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The Dow Jones-AIG Commodity Total Return Indexsm is up 8.5% so far this year. Leading commodity analysts provided their market outlook for the remainder of 2007 and for the beginning of 2008 this morning at the third annual Dow Jones Indexes – AIG Financial Products Corp. Commodities Outlook in London.
Oil prices continue to be high
“Increasing global demand, supported by the acceleration in the pace of economic development of emerging markets, and constraints in supply - both in the upstream and the downstream sectors - have pushed the oil price up every year since 2003. As efforts to expand supply capacity lag global demand growth in 2008, we expect this trend to continue. NYMEX WTI closed above US$ 80/BBl for the first time on 13 September. Looking ahead, the market balance tips largely in favor of demand growth relative to non OPEC supply growth over the next six to nine months, notably next winter, when normal temperature patterns are assumed after two consecutive very mild seasons. This leaves OPEC’s marginal barrel to fill the gap, but it may not always be enough or on time. OPEC’s decision to increase its oil supply by only 500 kb/d at its 11 September regular meeting in Vienna is a case in point. As a result, we can expect the market in 2008 to continue to live with high oil prices”, said Harry Tchilinguirian, senior oil market analyst at BNP Paribas.
Agricultural commodities expected to reach higher prices than ever before
“Agricultural commodities are making the headlines after their prices have been languishing for more than 20 years in the doldrums. The time of cheap food is over as recently observed in Mexico and Germany. Soil erosion, desertification, urbanisation, shrinking water reserves, land being diverted from its traditional uses and a rapid global population growth are some factors resulting in a decline in grain land per capita, therefore constraining supply of agricultural commodities. This trend occurs at a time of expanding demand, especially in the emerging nations where rising standards of living drive them in consuming higher protein content aliments. Also, and as a result of the rapid capacity expansion in the biofuels industry, the amount of grains and oilseeds used is increasing considerably. In 2000 in the US for example, 6.3% of the corn output was used for fuel ethanol, vs. 20.1% in 2006 and expected 24.3% in 2007. Going forward, and with ending stocks reaching historical low levels, rising costs of production and the comeback of inflation in the real economy, agricultural commodities prices should reach levels never seen before and bring with them meaningful opportunities for investors”, stated Mehdi Chaouky, fundamental analyst at Diapason Commodities Management.
Wide dispersion of metal sector returns in 2008
“On the back of a cyclical slowdown in demand and a modestly stronger supply side performance the base metal complex is likely to feature a wide spread of returns. Aluminum's downside is limited relative to the balance of the commodity complex as it is already well progressed through the inventory cycle. Nickel may be another commodity with less downside relative to the balance of the basket taking into account its decline in 2006 and 2007 so far. Copper, the out performer in 2007, may however lag after an expected strong performance around the turn of the calendar period from resurgence in physical market activity. Any softer outlook for copper needs to be predicated on minimal disruptions in supplies. The precious metals sector will be the out performer expected to benefit from a weaker USD, strong micro economic fundamentals and on-going robust investor interest”, commented Michael Jansen, base and precious metals strategist at JPMorgan.
Investor interest in index-linked commodity products continues
“We have seen continued interest from investors in the commodities futures market. This interest has been driven largely by the growing understanding of the importance of diversifying one’s portfolio by blending together different asset classes. The Dow Jones-AIG Commodity Index has continued to serve as a useful benchmark for these investors with an estimated US$38 billion as of the end of the second quarter tracking the Dow Jones-AIG group of commodity indexes on a global basis,” said Daniel Raab, managing director at AIG Financial Products Corp.
The Dow Jones-AIG Commodity Indexsm, a diversified and highly liquid benchmark for the commodities markets, is composed of futures contracts on physical commodities and was introduced in 1998. The 19 commodities currently in the Dow Jones – AIG Commodity Indexsm are: aluminum, cattle, coffee, copper, corn, cotton, crude oil, gold, heating oil, hogs, natural gas, nickel, silver, soybeans, soybean oil, sugar, unleaded gas, wheat and zinc.
