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Commodities Reach Inflection Point

London, March 2012

Commodity returns will take divergent paths as recommendations to actively manage exposures resonate amid higher energy price risk.

Petroleum prices have taken control of the commodity complex once again. This was the main cause for a very healthy gain of over 6% for the S&P GSCI index in February. Tension with Iran, the avoidance of a eurozone meltdown (at least for now) and an improving global economic backdrop has generally eased fears and pushed equity markets markedly higher in some places. A weaker US dollar also assisted, as has a backwardated petroleum curve.

Five Keys to 2012

The extent to which the upside potential in commodity prices is realised depends on the interaction of a number of variables. As BarCap note, five key questions will prove decisive in shaping commodity market prospects in 2012:

  • What’s priced in?
  • Will China’s commodity imports recover?
  • How will supply constraints evolve?
  • When will investors return to commodity markets?
  • Will this year mark the end of risk on, risk off?

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