Commodities Weekly

Commodities As An Asset Class: Commodity benchmark returns have continued to under-perform relative to other asset classes. During the current quarter agricultural and energy have been the worst performing sectors. The only bright spot has been industrial metals, whose performance has tended to be more closely linked to the global business cycle and equity market returns. Energy: The decline in Brent crude oil implied vol over recent years goes beyond the vol compression that has occurred in other asset classes. The crude oil vol term structure is also relatively flat past the three month tenor in contrast to steep term structures in equities, rates and FX. This would tend to indicate the relative complacency that currently exists in the crude oil market. Precious Metals: The gold price’s range bound nature over the past few months most likely reflects the positive forces of falling long term US real yields and ongoing geopolitical risk being offset by the negative forces of a stronger US dollar and until recently rising equity markets. Of the group, we view the decline in long term yields as unsustainable over the medium term suggesting gold’s resilience may start to fade. Industrial Metals: The performance of the complex continues to be strongly influenced by supply side themes. Nickel has suffered from the temporary closure of the Ramu mine leading to its out-performance versus copper. The return of Indonesian copper concentrate exports and strong production from the major producers illustrate the well-supplied nature of this metal. Agriculture: We expect the Russian import ban on US and EU agricultural productions will have more impact on domestic inflation than global agricultural balances. Of more interest for global balances will be concerns over excessive rains in France, Germany and Ukraine and their effect on this year’s harvest. This may help to explain the recent recovery in wheat prices.