The Opportunity in Weak Commodity Prices
Commodity markets – especially for crude oil — continue to face headwinds from excess supply and uncertainties about divergent monetary policies. But nascent positive trends give commodity markets a more balanced outlook, in our view.
Looking into the end of the year and into 2015, we feel investors should use the recent price pullbacks to take commodity allocations towards their long-term target allocations.
For the past two months, investor anticipation of new and large monetary policy stimulus in Europe and Japan has rallied the U.S. dollar and raised the cost of raw materials in local currencies.
We think the impact of these factors is overdone. During the coming weeks, expectations for dollar strength should moderate.
The crude oil market is particularly concerned about excess oil supply and the strong U.S. dollar. After touching $115/barrel in June, the price of benchmark European Brent crude oil fell by $35/barrel by early October, finishing below $100 for the first time since political turmoil erupted in Egypt in 2011.
It is also risky to assume that OPEC and U.S. supply will become permanent sources of excess supply. Extra U.S. production does not add much to new excess supply. If OPEC would only cut by 500,000 barrels per day (1.5% of their daily output), it could effectively erase the contribution of this year’s gain in U.S. production.
We believe the worries about slow global growth are overdone and that assumptions of sustained excess commodity supply ignore the production reductions already in progress in metals, as well as the potential for OPEC to cut its production significantly.
We would still be neutral commodities overall and continue to expect seasonal factors to give natural gas and petroleum a boost towards our target in the coming weeks.
By Paul Christofer. Christopher is chief international strategist with Wells Fargo Advisors, a unit of Wells Fargo & Co. Veronica K. Willis, a Wells Fargo Advisors international associate, contributed to this report.
Source: barrons- The Opportunity in Weak Commodity Prices
