The Dow Jones-AIG Commodity Total Return Index is up over 16 per cent this year, and the outlook for the sector is good, according to a panel of experts.
Prices are expected to remain significantly above 1990 levels.
"Over the past few years incremental demand growth in China has been equivalent to incremental supply growth in Russia. Russia's production problems today are highlighting a more widespread problem across the non-OPEC region to meet rapidly expanding oil demand, particularly across Asia," says Michael Lewis, Global Head of Commodities Research at Deutsche Bank. "Under-investment in productive capacity, limits to refining capacity and the potential for further extreme weather events are sustaining a bullish price outlook for energy prices into 2006. The dangers of a US recession in the near term are low.
"However, we expect the vigour of the US expansion to begin to slow during 2007 and this offers the best chance for oil prices to fall from current record highs. We see little chance of oil prices returning to the levels of the 1990s and envisage oil prices at USD40/barrel over the medium term, or more than twice the average level of the 1990s."
Continued bull-run in gold in 2005 with probable high of USD 475 and a possible high of USD 500: "As gold strikes a fresh 17 year high, there seems to be little overhead technical resistance until the psychologically important USD500 level," says Ross Norman, director of thebulliondesk.com. "Having recently broken some important chart points - is the market unencumbered for a move towards USD 1,000? Ongoing geopolitical tension, the prospect of inflation, a declining US dollar - and we have not even started to consider the markets fundamentals, which remain equally compelling. Onwards and upwards would appear the most likely scenario."
Base metals prices should remain well above long-run averages
"We are in the middle of a huge bull market in commodities, and as long as the global economy does not nosedive, 2006 is shaping up to be another strong year for pricing. Copper is the only one of the for main base metals which we see moving into surplus in 2006, and even there, the size of the surplus does not look big enough to return inventories to "normal" levels," says Adam Rowley, commodities analyst at Macquarie Bank Ltd. "Zinc and aluminium should see substantial reductions in inventories, and nickel inventories are likely to remain tight. As a result, base metals prices should remain well above long-run averages, although in the case of copper, that does not mean that they will be higher than today."
Investors Continue to Consider Commodities for Portfolio Diversification: "Commodities are continuing their multi year rally with the Dow Jones - AIG Commodity Index Total Return up 16.35 per cent Year to Date as of 16 September. Hurricane Katrina damaged key natural gas and crude oil production facilities as well as a significant percentage of US refining capacity just as winter approaches," says Daniel Raab, managing director at AIG Financial Products Corp. "The dramatic short term impact on natural gas and refined product (gasoline and heating oil) prices underlined the tightness of many commodities markets.
:Moreover, there are signs that higher energy prices may be filtering through to the broader economy with recent rises in both CPI and PPI. These recent events have again served to remind investors of the importance of commodities in the broader economy. In addition, they have underlined the lack of correlation between commodities and traditional financial assets as well as their long term positive returns."
Background notes: The Dow Jones-AIG Commodity Index, a diversified and highly liquid benchmark for the commodities markets, is composed of futures contracts on physical commodities and was introduced in 1998. The 19 commodities currently in the DJ-AIG Commodity Index are: aluminium, cattle, coffee, copper, corn, cotton, crude oil, gold, heating oil, hogs, natural gas, nickel, silver, soybeans, soybean oil, sugar, unleaded gas, wheat and zinc.
Currently, there is an estimated USD 15 billion invested in financial products that are tracking the DJ-AIGCI on a global basis.
For more information on Structured Products please click here