Commodity ETFs rally in April, but will it last?

May 3rd, 2016 | By | Category: Commodities

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The S&P Goldman Sachs Commodity Index (GSCI) recorded its best performing month for a year and the second best April on record. The index is up 15.5% since 29th February 2016, marking the biggest consecutive two months in almost seven years since May-June 2009 when it gained 20.4%.

Commodities perform in April

Commodity index – the S&P GSCI – saw its best month this year in April and second best April on record

According to data from S&P Dow Jones Indices, the Dow Jones Commodity Index and S&P GSCI total return indices also saw positive performances with gains of 9.1% and 10.1%, respectively.  However, the rally could be short lived, proving hard to sustain as a result of poor fundamentals underpinning the commodities.

Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices, said in a note: “There has never been an April with this many positive commodities, posting 20 of 24 winners (coffee, Kansas wheat, live cattle and feeder cattle lost).”

April is historically one of the best performing months for the S&P GSCI. Of the commodities included in the index four are in backwardation, which means that their spot or cash price is higher than the forward price – which usually occurs as a result of supply shortage (commodities are often traded in future contracts). The four commodities are copper, gold, cotton and lean hogs.

However, Gunzberg warns that the rally in commodities is likely to be hard to sustain. “It is concerning that only four commodities are in backwardation reflecting shortages, when performance is so high, because it means the fundamentals may not be in place to sustain the rally.”

Instead the rally is attributed to a falling dollar. According to the data there have been 24 months with better returns than in April 2016, but the backwardation count this low alongside the high returns hasn’t happened since 1974, when there were only six commodities in the index. “What it means is the supply/demand fundamentals may not be in place to support this commodity rally and that it may be driven more by the falling dollar,” says Gunzberg.

The iShares S&P GSCI Commodity Indexed Trust (GSG), which is listed on NYSE Arca, tracks a version of the S&P GSCI, which saw performance of 10.37% in April and 6.96% year-to-date. It has an expense ratio of 0.48%.

The S&P GSCI is heavily weighted in energy. Both WTI Crude and Brent Crude are in the index with weightings of 20.50% and 19.21%, respectively. The price of both has risen through April with Brent crude oil now hovering around $45 a barrel and WTI crude oil at $44 a barrel.

In April the major oil exporters (OPEC) failed to agree on a way to limit production and push prices up. This meeting last month was significant as it didn’t fail to deter the oil price from steadily rising through April, suggesting that the oil cartel is losing power, which could be supportive of oil prices. However oil could still be a bargain with prices still some 30% lower year on year. Added to this the market is now entering the so-called ‘oil reporting’ season.

Barclays ran a poll of more than 1,400 investors, between 31st March and 25th April on their client outlook for investing in oil. It found that almost half (49%) already hold oil, with a further 17% stating they have recently invested in or increased their holdings in oil. A further 14% said they are not currently invested in oil stocks but are interested in investing in them.

Clare Francis, Savings and Investing Expert at Barclays, said in a statement:  “As we enter into “big oil” reporting season it will be interesting to see the impact of the sustained low oil price on companies. However, investors currently seem undeterred by the lagging oil prices and optimistic about the longer term prospects of the stock. Looking ahead, we have already seen some commentators, for example BP, cite the high demand for oil and weak supply as evidence that the price will rebalance by the end of the year. Whatever the future holds for oil, it is vital that investors do their research so they are fully aware of the risks associated before making an investment decision.”

The ETFS Brent 1mth (OILB)  exchange traded product allows investors to gain a total return exposure to movements in the price of ICE 1 month Brent crude oil futures contracts has returned some 13.09% YTD.  The ETP uses fully funded uncollateralised swaps with Shell Trading Switzerland AG, a member of the Royal Dutch Shell Group to gain exposure. It has a management fee of 0.49%

 

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