Have investors missed the commodities boat?

Unexpected natural and geopolitical events in 2011 including the earthquake and tsunami in Japan, the Arab Spring in the Middle East and North Africa (Mena) meant last year was a strong year for commodities.

The S&P GSCI Spot index, which tracks spot prices paid for the immediate delivery of a range of resources, ended 2011 up 2.83 per cent, according to FE Analytics. The index is predominantly weighted towards industrial commodities, with 70.5 per cent in energy, 6.6 per cent in industrial metals and 3.5 per cent in precious metals. Among the sub-indices that make up the overall index, Brent crude oil, gold and precious metals all outperformed with returns of 13.73 per cent, 11.05 per cent and 7.98 per cent respectively.

The strength in commodities has continued into 2012. The S&P index recorded a 4.91 per cent gain from the start of 2012 to April 26, although the month of April resulted in a slight loss of 0.92 per cent.

S&P notes: “Energy has been the best performing major sector index in 2012 and remained the best performing in the second quarter, as measured by the S&P GSCI Energy index month-to-date decline of 0.31 per cent, [making] for a year-to-date gain of 6.98 per cent.

“The S&P GSCI Brent Crude index April decline of 1.72 per cent lessened the year-to-date gain to 13.37 per cent, just behind the S&P GSCI Unleaded Gas index year-to-date increase of 14.96 per cent.”

Energy

Angelos Damaskos, chief executive of Sector Investment Managers and adviser to the £49m Junior Oils and £28m Junior Gold funds, points out oil is an essential input into the world economy, primarily as a transportation fuel. In spite of economic difficulties in developed countries, he says there is unlikely to be a slack in demand for related sectors.

“At the same time we have China and India which are continuing to demand more oil, and there have also been reports that China in particular has been building a very large strategic petroleum reserve. In the short term they are demanding more oil than they consume to build up this reserve, which is going to be many millions of barrels of oil.”

In terms of geopolitical factors, Mr Damaskos highlights that Libya’s oil supply is still more than half offline. Short-term potential instability around Iran and other Mena countries such as Syria could also cause a “super-spike” in oil prices, with Brent crude already sitting at $112 a barrel.

Natural gas, by contrast, has seen its price fall, with Henry Hub Natural Gas Front Month Futures falling from a peak of $13.53 per million British thermal units (MMBtu) in July 2008 to $2.44/MMBtu in May 2012.

Mr Damaskos notes: “In the case of natural gas, there is a very large divide between what is happening in the US and what is happening in the rest of the world.