Commodity indices have continued to move higher thus far in 2019 with Energy (Oil) still leading the way resulting in a gain of +8.70% for the Rogers International Commodity Index® (“RICI®”) through 5/3/19 versus the +4.94% gain in the benchmark Bloomberg Commodity Index (“BCOM”). Both the Energy and Metals sectors have remained positive YTD (up +26.48% and +1.80%, respectively), however, the Agriculture sector has sold off the last few months and is down -4.93% YTD under the weight of generally ample supplies in the major grains and uncertainty around trade negotiations. Barring an extended trade war that slows world economies, we believe much of the effect of the current and potential tariffs are now discounted in the prices of many commodities and will not hold prices from rising over the longer term. (Blog – Who Cares About Tariffs?)

Additional Sources of Return

For the remainder of the year, one might expect some reversion to the mean amongst the sectors particularly with Agriculture being so oversold relative to Energy. The monthly rebalancing employed by the RICI® should continue to benefit returns as the sectors, as well as the individual commodities, tend to mean revert in the short term. Backwardation in WTI, Brent and Natural Gas may continue to enhance returns even if the overall energy sector begins to consolidate recent gains. Lastly, the RICI® methodology assumes that the collateral earns the yield of the 90-day US T-Bill which is currently hovering near +2.4% and thus provides another source of return as investors await higher prices.

Despite the lingering negative sentiment that developed in response to the unexpected drop in Oil in the 4th quarter, we believe that the broad-based recovery in commodities that began in early 2016 looks poised to continue over the foreseeable future and the prospects for a total return commodity index, such as the RICI®, are decidedly positive.

Reasons To Be Bullish On Prices

Metal supplies are tightening due to the fact that total capital expenditures by the mining industry have dropped over -65% from 2012 to 2018 and are estimated to drop another -50% to just over $20 billion by 2020. This is the lowest in over a decade according to Wood Mackenzie consultants. Overall, the industry will need about $200 billion of CapEx that is currently not-committed over the next decade to meet deficits,” Research Director Sinden explained. Lack of Investment in the Mining Industry -KITCO

Copper is building to a deficit with a growing gap between demand and supply over the next few years. CRU Company, the London based commodity research house projects a 270,000 ton deficit by 2023. CRU Group sees copper deficit -Bloomberg

China’s demand for Agriculture could drive the next major cycle in commodities as their consumer economy is poised for multi-year growth. Demand for food to launch commodity super-cycle

Record short positions in Grains is a strong contrary indicator for agriculture just as it was for Oil near the bottom when short interest peaked in December 2018. Bloomberg reported in their May Commodity Outlook that combined managed money short positions are at a record high (since their data began) in the Bloomberg Grains Index. Bloomberg Commodity Outlook – May – 2019

The limitations of Shale and Fracking are becoming more evident as financial and operational pressures mount. Shale Companies Threaten Future of Oil Boom -WSJ

Buffet Makes Long term bet on higher Oil prices: Buffett says Occidental investment is a bet on oil prices over the long term -CNBC

First Quarter 2019 In Review: Broad Recovery From Fourth Quarter Sell Off

Commodities exhibited a positive first quarter with Oil recovering strongly from the extraordinarily steep sell off in the 4th quarter, 2018. Our last couple of commentaries discussed the unusual confluence of events that appeared to cause the sell off and why we expected it was making a major bottom. The RICI® closed the first quarter up +9.38%, outpacing the benchmark BCOM which was up +6.32%. A total of 21 of the 38 components in the RICI® were positive for the quarter and only 3 of the 17 negative commodities were outside the Agricultural sector (palladium, silver and natural gas). Agriculture is the least economically sensitive of the three sectors and thus the improved economic outlook over the course of the quarter did not affect the sector as much as it improved the sentiment for the Metals and Energy sectors.



A Global Demand-Based Portfolio

The RICI® is a composite, US dollar-based, total return index methodology. It represents the value of a basket of commodities consumed in the global economy, ranging from Agricultural to Energy and Metal products. The Index’s weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on nine exchanges in four countries.

(To access additional management commentaries & reports please visit our web site for Financial Advisors and Institutions by clicking here. For further insights visit our Commodity Curve Blog.)

DISCLAIMER: The index returns shown above do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance or provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any index performance provided is for illustrative purposes only. The time period selected represents the inception date of the Rogers International Commodity Index® and is intended to provide a historical long-term average. Data provided by Bloomberg LP, BarclayMAP, and RBC Wealth Management. Past performance is not indicative of future performance.


Alan Konn

Partner & Managing Director of Price Asset Management