As 2013 is wrapping up and we look out to 2014, there are some key questions about the drivers and opportunities in commodities in the coming year, as discussed in this interview.
Below are some of the questions discussed PLUS a bonus question about metals.
Q1: Jodie, let’s talk about commodity performance in 2013. It looks like the S&P GSCI is off about 1.9% (ytd through Dec 18, 2013) and the Dow Jones UBS Commodity Index down 9.3%. What market events pushed down the performance of these indices this year? Given the commodities in each of the flagships is roughly the same, the most important factor for the performance difference between the indices is the weights. Energy has been the only positively performing sector, up about 5%, which has really helped the S&P GSCI with about 70% of its weight in energy. Agriculture, which has the second heaviest weighting in the S&P GSCI of about 15% lost 17% in 2013, led by corn and wheat, both in bear markets, down 29% and 27%, respectively, led by favorable weather and a stronger U.S. dollar. However, from the different weighting scheme of the DJ-UBS, metals were the main culprit, led by gold. Gold lost 30% in 2013 on stronger sentiment about an economic recovery and has the biggest target weight in the index of over 10%. My last point about how much the constituents and weights matter is demonstrated by POSITIVE performance this year from the S&P World Commodity Index (WCI) that is ex-US. It has 22 commodities across eight international exchanges and is world production weighted, just like the S&P GSCI. While it was only up slightly, about 1%, it was the European commodities, led by Brent crude oil, that pushed the index into the black.
Q2: What type of head winds might the commodity market run into or continue to run into in 2014? Although commodity performance was largely negative in 2013, the severity was light for the risks that were and continue to be in the market. The Chinese demand growth stayed on target, the U.S. did not default on its debt or fall off the fiscal cliff, and major crises were avoided in the Eurozone. By now, it even seems that while the Fed tapering and Chinese demand growth are still hot topics for commodities as we enter 2014, the geopolitical environment like the Syrian tensions have overtaken the attention of the Eurozone crisis as a top driver of commodity performance.
Q3: What potential impact, if any, will the US oil production revolution have on the commodity markets and international oil prices? If the production grows more quickly than the technology and logistics can to transport it, then there may be inventory excess and price pressure like we’ve seen in WTI. What is more important to the indices about the U.S. energy revolution is how the weights are impacted. From 2011-2014, the combined weight of WTI in the S&P GSCI and DJ-UBS has dropped by about 15% and has been mostly replaced by Brent.