All’s not lost: Commodities ex-oil stage comeback

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Focus may be on volatile oil prices right now, but investors shouldn't overlook the strong performance in other commodities, one expert warns.

Ten commodities were in backwardation this month, a sign that markets outside of oil are recovering, according to a recent note from S&P Dow Jones Indices: copper, corn, cocoa, silver, coffee, live cattle, feeder cattle, heating oil, Kansas wheat, and lean hogs.

Backwardation occurs when the present spot price of a commodity is higher than the futures price, typically signaling a surge in demand and shortages in supply.

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Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, called this is a sharp reversal of the trend seen in June through October, where only four commodities were in backwardation, with most sectors on the benchmark S&P GSCI Total Return Index posting losses from June onwards.

However, a look at the index now confirms the turnaround in sectors from their respective bottoms: Agriculture gained nearly 12 percent, livestock rose 6 percent, precious metals are 7 percent higher, and industrial metals recovered 0.6 percent.

Looking at individual commodities, corn traded on the Chicago Board of Trade is nearly 30 percent higher from a five-year low hit in October, while silver is up 1 percent from October's eight-month low.

Experts say those steep falls were on the back of conventional wisdom that lower oil prices add to downward pressure on other sectors. Crude oil benchmarks have lost nearly half their value in the past six months on the back of a supply glut.

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"There are often good reasons to expect oil and other commodity prices to move in the same direction. For a start, there may be common drivers, such as the health of the global economy or the value of the U.S. dollar, which could affect all commodities in much the same way. What's more, oil itself is typically an important input cost in the production and transportation of other commodities, notably in mining and agriculture," said Julian Jessop, head of commodities research at Capital Economics on Thursday.

Why the turnaround?

"At some point, the oil price slide decoupled from the other commodities since their fundamentals are different… now energy seems to be on its own," Gunzberg said. Indeed, energy's drop-off from other sectors is clear in the graph below:

Moreover, the current slump in oil prices is largely due to supply-side developments specific to the oil industry, and isn't indicative of generalized weakness in demand, Capital Economics' Jessop stated. These developments include the boom in U.S. shale production and the waning power of OPEC.

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"Our interpretation is that other commodity prices have already adjusted to the sluggishness of the global recovery and the slowdown in emerging economies in particular, led by China," he added.

Each commodity has its own varying demand and supply factors, said Avtar Sandhu, senior manager of commodities at Phillip Futures, pointing to coffee as an example. One of 2014's standout commodities with year-to-date gains of 56 percent, coffee prices rallied on shrinking output from leading producers Brazil and Vietnam on the back of inclement weather.

Beneficiaries of lower oil

Capital Economics expect cheaper oil to be a net positive for metals, especially gold.

Typically, lower oil prices are expected to reduce demand for inflation hedges like gold. Yet, the group believes the boon lower prices bring to energy importing economies like China and India, also the two largest markets for gold. Thus, the lower tax bill is expected to boost economic activity and offset gold's traditional relationship with oil.

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"We therefore continue to expect the price of copper to recover to at least $7,200 per ton by end-2015 (from around $6,375 today), and gold to $1,300 per ounce (from $1,198), helped rather than hindered by the lower oil price."