Have commodity prices bottomed?

By Edward Harrison On Mar 10, 2009

If you have been folowing the commodities market, you would have noticed that most commodities have been rallying of late. This includes oil, silver, gold, base metals and agricultural commodities. Oil has gone from the low 30s to threatening to pass $50 a barrel. I had predicted a decline to $25 before oil rose to $55 a barrel. It’s looking like the bottom is in for oil.

The question is whether this rally has legs. Looking at the Baltic Dry Index it may well do. The index is a common measure for shipping costs and it is at its highest level since October.

On the whole, I tend to believe the economy will remain in the doldrums throughout 2009. The International Monetary Fund has recently predicted that the global economy will register a decline in GDP for the first time in 60 years. However, that is not a foregone conclusion. If the commodities trend holds, it may signal an uptick in the global economy.

Update 11 Mar 2009: Below is a good link to more on The Baltic Dry Index, from an article which appeared today.

Understanding the Baltic Dry Index – The Daily Angle

5 Comments

kynikos says 15 years ago

I do not know if it would be a good time to long commodity indices, although I still think the contango will not make the risk/reward attractive. Long or short does not have an attractive risk reward.
Edward Harrison says 15 years ago

kynikos,

I understand you statement to mean you think we are in a volatile period where things could head either way. That seems to be accurate, but wouldn’t you consider the risk/reward of getting long here a whole lot better than remaining short?
kynikos says 15 years ago

One could short a commodity index fund such as USO. I suppose the contango losses from the negative 2.0% roll yield per month you become your gain if you short it. I still do not like the contango on commodities though, but since commodities such as oil and energy have high “beta” now, I suppose they might benefit in a bear market rally.

The contango for metals does not seem as bad though.
Edward Harrison says 15 years ago

kynikos,

thanks for your input. I had called a lowof $25 for oil but I think that’s not in the cards for oil unless we see a complete economic collapse. And with China about to do some heavy lifting on the infrastructure front, metals will have a floor on them I suspect.

Some good thoughts on oil contango and the recent rally at Alphaville as well:

https://ftalphaville.ft.com/blog/2009/03/10/53404/contango-smashing/

Dennis Gartman summed up my thinking here and makes me nervous about rolling forward a short contango position:

“Those who bought crude in the front, took delivery, had the crude stored in ships or tanks or rail cars et al, and who sold the back months to hedge in the huge carrying charges that were on offer two and three months ago are now sitting upon huge profits. Indeed, the only thing that shall keep crude oil prices from moving rather sharply higher shall be the reemergence of this stored crude oil back to the market as the shifting term structure demands that that crude put into storage be drawn out.”

Either direction is fraught with great risk right now.

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