EX-Energy the RICI® is positive QTD!!
Contrary to “popular” belief, Commodities are NOT in a broad-based sell off since the end of the 3rd quarter. The Agriculture Sector of the Rogers International Commodity Index® (‘RICI®”) is positive and the Metal Sector is only down slightly since end of September. The decline in the RICI® quarter to date is truly oil centric. Even Natural Gas, which has been extremely volatile, is positive so far this Quarter!
RICI® Sectors YTD (as of 12/19/18):
RICI® Agriculture Sector (34.9% of total Index): Up +1.06%
RICI® Metals Sector (25.1% of total Index): Down -1.45%
RICI® Energy Sector (40% of total Index) Down -23.34%
It is the nearly 40% decline in oil which has caused the RICI® to drop into negative territory for the year. Sharp, significant declines in oil prices of this magnitude historically represent excellent opportunities to buy, not to sell, as this is how oil usually bottoms. For those interested, Goldman Sachs recently took a very bullish stance on the asset class and ultimately sees oil prices returning to $70+ a barrel amid a broad-based commodity rebound leading to an estimated 17% gain in the coming months. Goldman’s Jeff Currie is a 20+year year veteran and has indicated that commodity prices and the fundamental value of the assets are more out of whack than he’s ever seen. In his view, that’s because so many active investors that trade commodities based on fundamentals like supply and demand have abandoned the market. It appears there are a number of technical, emotional, and political factors at work in the oil markets causing much of the volatility and an oversized decline that is detached from long term fundamentals. Goldman’s Bullish call on commodities
As we have written before, the cure for low prices is low prices. Most of the commodity markets are showing excellent resilience thus far in the 4th quarter to date, however the magnitude of the drop in oil prices is causing the capital and energy markets to react setting the course for a potential rebound.
- High yield spreads are widening quickly across the energy industry and may limit the ability for the fracking industry to continue to finance unprofitable operations. High Yield Debt reacts to oil decline!
- The fracking industry in the US has struggled to be profitable and cannot break even at $50 per barrel. Fracking Profits at $50 a Barrel? Don’t Bet on It
- The Baker Hughes Rig Count has declined 2 weeks in a row including the largest decline in over 2 years reported on December 7th . US Oil Drillers cut most rigs since 2016
Beyond oil, many commodities are currently priced below the estimated cost of production and the average price in the RICI® remains 50% below their highs over the past 20 years! The case for commodities in diversified portfolios remains solidly intact and the consumption-based RICI® methodology, which is outperforming the industry benchmark Bloomberg Commodity Index, provides excellent exposure to this global asset class.