Comodities Outlook

Global

Macro

11 January 2010

Commodities Outlook

Commodities as an Asset Class: Investor appetite for commodities has never been stronger, in our view. We expect renewed inflows into the sector during 2010. However, we believe threats to the complex start to appear as the authorities remove monetary and fiscal stimulus later this year. Crude Oil: We expect that 2010 will mark the transition back to the traditional fundamentals relating to oil supply, demand and inventories in contrast to financial, currency and equity market drivers that we believe dominated oil price trends last year. In our view, this would mean that rallies in the oil price above USD80/barrel will only become sustainable in 2011. US Natural Gas: We expect natural gas prices to average USD6.00/mmBtu in 2009 and believe prices should average close to this in 2011 and 2012 as well. With ample supplies available from the shale plays and imported LNG, we no longer expect a return to a long-term 8-10 to 1 oil/gas price ratio. Precious Metals: We believe the US dollar and investor inflows into gold will become less constructive for the gold price in the first half of this year. Indeed the US dollar tends to do well in anticipation of Fed rate hikes. We prefer to express bullish views in the sector via PGMs and silver as global growth recovers and new PGM investment vehicles come to the market. Industrial Metals: The industrial metals complex was the best performing of the four broad commodity sectors in 2009. From a valuation perspective, we believe investors need to recognize that asset classes that have been past winners have a habit of becoming future losers. From a fundamental perspective, we believe Chinese restocking, which was such a powerful force in 2009 on pushing copper prices higher, may move into reverse this year. Agriculture: 2009 proved that even small supply disruptions can have a powerful impact on agricultural prices such as sugar, cocoa and coffee. We believe parts of the...