Commodities have recovered this week along with equities, led by agriculture and energy prices. 2011 will be remembered by the dichotomy between energy and non-energy commodities, says Mike McGlone, Senior Director, Commodity Indexing, S&P Indices…

It was a bad year for dictators, terrorists, bankers and global equities but the S&P GSCI fared relatively well in 2011, ending 22 December with a YTD decline of 1.16% on the back of a 2.09% decline in December. 

Along with equities, commodity prices bounced back from declines earlier in the month led by a recovery in agriculture and energy prices.  In 2011, one of the most significant commodity themes has been the dichotomy of strength in energy prices relative to most other commodities, with the notable exception of gold. Led by petroleum, as measured by the 7.94% YTD increase of the S&P GSCI Petroleum index, the S&P GSCI Energy index increased 5.45% in 2011 with weak natural gas prices accounting for the difference. By comparison, the S&P GSCI Non-Energy index ended December 22nd with a YTD decline of 14.39%.

The Industrial metals sector was the leading sector loser in 2011 as measured by a 22.63% YTD decline in the S&P GSCI Industrial Metals index.  This is a bit disconcerting, as 2007 marked the last year that the S&P GSCI Energy index ended the year with an YTD gain while the S&P GSCI Industrial Metals Index declined. 

The precious metal sector was the best performing in 2011 as measured by the YTD gain of 9.78% in the S&P GSCI Precious Metals index, but by December 22nd, it was only about gold, as silver earned its nick-name as the ‘devils metal’ in 2011, ending the year with a YTD decline of 6.50% as measured by the S&P GSCI Silver index. Backwardation and energy prices -- what seemed like an oxymoron after 2008, reemerged as every S&P GSCI petroleum commodity ended 22 December with backwardation shaped futures term structures when measured to the one year out future.

Ironically, energy commodities marked the best and worst performers in 2011 as measured by the YTD gain of 19.94% for the S&P GSCI Gasoil index compared to a 40.51% decline for the S&P GSCI Natural Gas index.  Tight supply demand conditions in the petroleum products helped to boost returns due to rolling into backwardation while ample supplies of North American natural gas continued to pressure natural gas index returns.  Wheat was the 2011 second worst performing single commodity index as measured by the 37.11% decline in the S&P GSCI Wheat index.  Following sharp price increases in 2010, bringing-on-supply was the agriculture theme in 2011.  
 
The most significant emerging theme for 2012 is the risk and repercussions of sustained higher energy prices as overall commodity markets are being supported by rapidly increasing demand from developing countries while partially fuelled by extremely low base interest rates in developed countries. The 2011 year may have represented a bit of a paradigm shift in the commodity markets as represented by the S&P GSCI Energy Index which is up on the year while most global equity indices have declined. The potential paradigm shift is that of the change in the global demand and the drivers of economic expansion towards the developing world potentially at the expense of cash strapped consumers in the developed world.