2013 Commodities Outlook | Citi

[Jay Shah]

 Seeking alpha in commodities in the years ahead poses challenges, as it is now clear that the commodity supercycle is over.  No longer will a pure long-only strategy bring the returns expected in 2002-2008. Nor will conditions approximating those of the last decade return any time soon. 

 What first occurred in US natural gas – a marshalling of capital and a new supply surplus – is being replicated across most commodities, including critical industrial and bulk commodities and in other longer-lead time products such as oil, even with risks to supply disruptions. 

 Two structural shifts in China are also forcing a re-evaluation of commodity demand; including lower-paced growth and a far less commodity-intensive economy. 

 A global rebound in commodities demand is anticipated, perhaps by the end of 2013, given all of the policy stimuli packages that are being implemented.  Some markets will tighten more quickly  than others, but as demand rebounds along with global growth, commodity prices are unlikely to move sharply higher.  

 As demand rebounds, commodity performance is  likely to become more differentiated,  with winners and losers depending on the supply/demand balances for individual commodities. 

 Seasonality has been on the rise over the past few years, particularly in oil and agriculture, impacting fuel and food and through them inflation rates across the world. This increase reflects changing precipitation and temperature as well as changing inventory patterns. 

 Radically changing conditions are also at work. In oil there has been a marked increase in the normal scale of supply disruptions doubling from 400-500-kb/d pre-Libyan revolution, buoying prices. Globally grains are seeing more extreme weather as part of a new “ab” normal as well.

 Enhanced seasonality, commodity differentiation and macro conditions will continue to create new long-short strategic opportunities and new ways to invest across different asset classes, combining commodities with foreign exchange as well as other asset markets including equities.

 Exceptional rewards from tail risk events should continue to make commodities an attractive investment vehicle for a wide array of portfolio managers, as no other asset class provides such an opportunity from wildcards. 

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Best Regards,
Jay Shah, FRM
Expect the unexpected!!!