The benchmark Reuters/Jefferies Commodity Index has now fallen by 51% from its peak in July (see chart below).
But as I’ll explain in a moment, commodity prices are set for a rebound. And if you are willing to take a longer term view, this is a once-in-a-lifetime opportunity.
Commodity prices reflect future expectations about the global economy. Less business activity and infrastructure spending means less demand for commodities. And right now the markets are pricing in a sharp slowdown next year.
A big part of the commodities sell-off has been driven by fear. In addition, speculators and hedge funds have been forced to sell to raise cash as markets tumble.
However, the underlying supply and demand for some key commodities are little changed from when prices were at all-time highs just a few months ago.
And that means commodity prices could rebound a lot faster than markets are predicting. Let’s look at the supply and demand situation for oil.
Oil will lead the rebound
In July oil hit a record price of $147 per barrel. It has since fallen by 67%. But the International Energy Agency (IEA) forecasts that demand will grow by 0.5% next year, despite the global economic slowdown. That’s because developing economies like India and China are still growing.
In addition, the markets are currently pricing in a substantial drop in demand for oil from developed countries. But the IEA predicts that demand won’t fall that much. Again, this should support the oil price.
At the same time, the OPEC oil exporters’ cartel is getting ready to slash production to boost the price. They will meet in Oran, Algeria on December 17th. Just yesterday the cartel’s president, Chakib Khelil, warned that “the Oran meeting will decide a severe production cut to stabilise the oil market.”
And it’s not just OPEC cutting oil production. Russia’s president says his country may join OPEC in reducing output to boost prices. That is big news. Because Russia is the world’s biggest energy exporter, and this is the first time it is openly talking about coordinating oil cuts with OPEC. With demand holding up and major oil cuts looming, the recent drop in the oil price just can’t be justified. And now the market is catching on to it.
The price of oil surged by 10% yesterday to $47.98. Our forecast is that it could easily double by the end of next year.
Buying into oil is the first way to position yourself to profit from the rebound in commodities prices.
But there is more to the coming commodities rebound then just oil…
Agricultural commodities are set to follow
A rising oil price will have a knock-on effect on many other commodities. And I expect that some of the biggest moves will be in agricultural commodities over the next twelve months.
Agricultural commodities were the last to join in the commodities rally this decade. There is a good reason for that. The surge in agricultural prices wasn’t driven by the Indians and Chinese suddenly eating a whole lot more. Prices went up because crops like maize and sugar were diverted into use as biofuels (rather than as food) – as the high oil price made biofuels more a more cost-effective substitute.
The relationship between oil and biofuels is crucial. It becomes efficient to produce ethanol from maize when oil is at $50 per barrel. For sugar it makes sense when oil is just $39. The higher above those prices oil is, the more sense it makes to produce ethanol. Now as the oil price rebounds, demand for cheaper biofuel will soar.
Increased production of these biofuel crops will also mean diversion of land and other resources away from the other food crops. That’s why it’s highly likely we’ll see a broad rebound in agricultural prices next year.
Not all commodities are going to be winners
Be aware that the commodities outlook is not universally bullish. Metals, for example, could be in for a lot more pain. But oil and agriculture definitely look set for a rebound in 2009.
Regards,
Manraaj Singh
For Fleet Street Daily
PS A recent report from our Profit Hunter newsletter shows why Africa will be one of the biggest winners from this rebound. This report also explains how you can profit from the rebound with one simple investment. To view this report, follow this link now.
Yet more cause for optimism
BY BEN TRAYNOR
You saw yesterday that an investor “duped” by the bear market rally of 1931/2 would still have come out handsomely ahead over the long run.
Today we bring you another reason not to be too depressed by the outlook for stocks in 2009.
The chart below is taken from a World Bank report called ‘Commodities at the Crossroads’. It shows that, despite the pessimism we read each day, the World Bank forecasts a recovery for developed economies within the next 12 months:
It’s not just developed economies, either. Here’s how the World Bank thinks emerging nations will perform:
As my US colleague Justice Litle points out, the market looks forwards, not backwards. The historical tendency, therefore, is for stocks to rebound before the economy starts to recover.
If a recovery does happen as forecast, then anyone buying shares now could be sitting on a nice profit by Christmas next year.
The Daily Reckoning – Why Treasuries may turn toxic quickly
BY BILL BONNER
Yesterday brought another almost 200 point drop in the Dow. Gold rose $17.
What’s going on?
Reuters reports:
“ The "nasty" U.S. recession will tighten its grip next year as unemployment rises and weak home and stock prices imperil consumers, finance firms and debt-laden businesses, a UCLA Anderson Forecast report released on Thursday said.
“Additionally, a sustained retreat in prices for goods and services is a very real possibility that would further drag on the economy, according to the forecasting unit's report.
You can read the Daily Reckoning in full here
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