Commodities
Commodity Watch
Structural oil re-pricing raises risk of return to “bear-bull” market
Structural oil re-pricing has driven strong commodity returns
A dramatic rise in long-dated oil prices that has driven substantial
increases in commodity index returns year to date has appeared to defy
softening demand fundamentals, leading to explanations of speculators
and “risk premiums”. However, we believe that the market is experiencing
a structural re-pricing much like it did in 2004, searching for a new
equilibrium against an uncertain long-term supply environment and
continued robust demand growth from the BRICs.
Risk of a return to a "bear-bull" market has increased
We believe that further increases in long-dated prices required to constrain
trend oil demand growth in line with anemic supply growth have the
potential to lead to the return of the “cyclical bear-structural bull market”
that characterized the 2004/2005 period, as rising prices soften near-term
fundamentals, resulting in persistent contangos in the crude oil curves.
Risk of a return to sustained contango favors enhanced indices
As a result, we recommend investments in enhanced index strategies that
employ a dynamic rolling strategy for crude oil, which works to reduce the
drag from negative carry by rolling further out the curve only when the
front end of the forward curve is in contango. Given this focus on
enhanced indices, we are now forecasting returns for the S&P GS
Enhanced Commodity Index rather than for the standard index and expect
sizable further gains from this index over the next year of 17.5%.

Table of contents
Current trading recommendations 3
Price actions, volatilities, and forecasts 4
Structural oil re-pricing raises risk of return to “bear-bull” market 5
Sector overviews 12
Commodities in a nutshell 19
Energy market forward curves and market fundamentals 21
Industrial metals forward curves and market fundamentals 24
Precious metals forward curves and key exchange rates 25
Agriculture forward curves and market fundamentals 26
Livestock forward curves and market fundamentals 28
Macroeconomic indicators 30
S&P GSCITM total returns by commodity and financial asset total returns 31
Disclosures 33