Futures & Commodities

Are you brave enough for this commodity trade?

Is there more pain coming before gains in commodities?

With crude oil prices below $40 a barrel and still falling, it's a courageous trader who wants to boost his commodity exposure. But for those that do, ICBC Standard Bank has a novel suggestion.

Demetrios Efstathiou, head of trading strategy at the bank, recommends investors look at bonds from major commodity exporting nations — particularly in Central Asia.

"As commodity importers appear safe but expensive, we think that for value, investors have to look at cheap commodity exporters. It is indeed a brave proposition to invest in them when commodity prices are still falling but a gradual accumulation of positions makes sense, especially among selected oil producers as oil prices are expected to bottom out next year," the London-based strategist said in a report on Monday.

Workers perform maintenance on an oil pumping unit near Atyrau in Kazakhstan.
Andrey Rudakov | Bloomberg | Getty Images

The price for a barrel of Brent or West Texas Intermediate (WTI) crude oil fell below $40 for the first time in almost six years earlier this month. On Monday, Brent traded 3.8 percent lower on the day at around $36.50 per barrel, while light crude traded at roughly $34.80.

Oil prices have tumbled since June 2014 from a peak above $110 per barrel, due to supply-demand imbalances. U.S. shale gas production has risen and OPEC has maintained output, while demand from China, a massive consumer of commodities, has waned.

Efstathiou said that with oil prices seen bottoming next year, credit investors should consider commodity-exporting countries with large pools of currency assets and flexible exchange rates, allowing them to "survive in this harsh external environment." In particular, he recommended Kazakhstan and Azerbaijan, two former Soviet Republics bordering the Caspian Sea in Central Asia.

Kazakhstan met Efstathiou's criteria because its currency floated last August. The Kazakh tenge has since slumped to 334 against the U.S. dollar from 180, boosting the value of the country's national oil fund as a proportion of its gross domestic product (GDP).

Similarly, Azerbaijan has a national oil fund equivalent to a massive 60 percent of GDP, according to Efstathiou. Its currency is still controlled, but a "managed" or "dirty" float — where exchange rates are allowed to fluctuate, but central banks' still attempt to influence them — is possible in 2016, he said.

"While a 35 percent devaluation (in Azerbaijan) last February dealt with the initial shock of oil falling to $50 per barrel, with the budget for 2016 based on an average Brent price of $48pb, a second devaluation or even a move to a managed float is a possibility next year if the price of oil price stays below $40pb for a while," the strategist said.

Kazakhstan is a major oil producer and has the second-largest reserves and production after Russia among the ex-Soviet Republics, according to the U.S. Energy Information Administration (EIA). Azerbaijan is also an important oil and natural gas supplier to European markets, despite conflict with Iran over rights to offshore oil fields.

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Earlier this month, Standard & Poor's affirmed the credit rating of Azerbaijan's state oil company at BB+ with negative outlook. It said that the company's credit metrics would remain relatively stable, with the decline in oil prices mostly offset by the devaluation of the Azerbaijani manta.

WTI crude prices fell below $40 per barrel on December 4, followed by Brent on December 8.

On the latter date, the EIA updated its average oil price forecast for this year and next. WTI is seen rising to $50.89 this year from $49.08 in 2015, while Brent is seen averaging $55.78 in 2016, up from $52.93.

However last week, the executive director of the International Energy Agency warned that crude prices could continue to fall in 2016.

"Demand is weaker and we may well see Iran come back (to the market) and there will be a lot of oil… so 2016 may well be another year with lower prices," Fatih Birol told CNBC on Wednesday.

Azerbaijan's economy is seen expanding by 2.5 percent next year, when the Kazakh economy is expected to grow by 2.4 percent, according to the International Monetary Fund.

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