Profiting from Commodities will be a Challenge Throughout 2012


Author Larry Berman

Posted: 3 Apr 2012 reposted from etfcm

Between steep contangos in many futures curves, a general uncertainty over the short-term outlook for the US dollar, geopolitical risks, and unseasonal weather, making money in commodities is going to be a challenge this year. We are longer-term bulls to be sure on the global growth coming from emerging markets, but we have probably hit some sort of mid cycle peak and we are concerned that global growth in the next few years (austerity driven) is going to have a material slowing impact on commodity prices.

These global macro issues are difficult to time and fully contemplate, but they do have material impacts on investment horizons that for the most part are shortening. We calculate there is a $15-20 geopolitical risk premium in crude oil and risk of an Iran-Israel conflict seems inevitable, but impossible to time. The futures curve has a premium through year end.

Short-term risk in rising gasoline prices may have a more material economic impact with WTI inventories at record levels relative to the 10-year average. A hard landing scenario in China is a downside risk over the next few quarters.

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