A Commodities Call for the Remainder of 2017

Broadly speaking, commodities have performed poorly this year. Specifically, energy commodities have been hammered, but there have been solid performers in the commodities complex, including some precious metals.

“Not all commodities have done poorly year-to-date. The weakness in some commodity indexes has been largely about energy. Oil prices are down nearly 20%; natural gas has done even worse. However, metals have performed better along with select agricultural commodities, notably corn and wheat,” said BlackRock in a recent note.

The iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA:GSG), a diversified commodities fund, is off 11% year-to-date. GSG, which just turned 11 years old, follows the S&P GSCI Total Return Index. The $1.1 billion ETF features exposure to eight commodities.

“The global oil supply glut hasn’t eased as fast as we thought it would, but we expect to see a reduction in global oil inventories—and a rebalancing of supply and demand—in the second half of the year. Current OPEC compliance with production cuts is well above the historical average and it typically takes two to three quarters for inventories to reflect such cuts,” according to BlackRock.

Related: Conditions Are Looking Up for Oil ETFs

While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.

GSG allocates over 57% of its weight to energy commodities with agricultural commodities and industrial metals combining for almost 30% of the fund’s weight. The ETF currently resides about 7% above its 52-week low and 4.8% below its 200-day moving average.

Industrial metals have been solid performers this year as global economies continue rebounding.

“The Journal of Commerce (JOC) Industrial Metals Index is up approximately 6% year-to-date. This is consistent with the global improvement in manufacturing surveys. For example, in the U.S. the Institute for Supply Management (ISM) Manufacturing Index has risen three points since December and is now close to a three-year high. Even more encouraging, the new orders component has been particularly strong,” according to BlackRock.

Although it is faltering in terms of performance, GSG has seen over $206 million in year-to-date inflows, perhaps a sign some investors are comfortable betting on a commodities rally.

For more information on the commodities market, visit our commodity ETFs category.

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