Winner Doesn't Take All in Commodities -- Heard on the Street

Liam Denning

     Besides ennui--and possibly adding to it--January brings a flurry of look backs totting up the

winners and losers of another year gone by. When it comes to commodities, though, where you fit on

the tally isn't always clear cut.

     The simplest way to assess things is to compare the price for a particular commodity at the

close of 2013 with a year earlier. On that basis, surveying 21 major commodities on FactSet, the

front-month natural-gas future did best. It was up 27%. Corn, down almost 40%, did worst.

     But given commodities' volatility, just choosing a date and measuring the change from a year

ago is pretty arbitrary, even if it is the emotional end point of Dec. 31. Moreover, unlike fund

managers and other speculators, the profits of producers of raw materials such as oil majors and

miners are tied more closely with how yearly averages for prices have changed.

On that basis, gas still wins--but by even more, up more than 35%.

     The rankings change considerably for others, though. Lumber futures, down almost 4% year-end to

year-end, rose by almost 21% when 2013's average is compared with 2012's. Palladium, a star

performer of recent years, eked out a 2.1% gain on a simple basis, but its average rose by almost

13%. And corn, its average down by 14%, is no longer the laggard; Coffee is, down 28%.

     There is one other twist: Futures markets provide some insight on where prices might go several

years out. And expectations seem to have collapsed.

     Take crude oil. The front-month contract showed a reasonable gain of 7.2% year-end to year-end

a more modest 4.1% when yearly averages are compared. But further out, the picture has changed

substantially. A year ago, futures implied oil gently declining from about $94 a barrel now to a

floor of around $85 a barrel by late 2018. Today, oil trades higher in the immediate future, at

around $95, but the curve slumps below $80 by spring of 2017.

     Now, reassess gas. A year ago, futures averaged $4.03 per million British thermal units for

2014, rising to $5.46 in 2020, up 35%. Today, the 2014 average, at $4.17, is a shade higher. But the

curve now stays flat for four years. Prices eventually reach $4.44 in 2020--up just 6.6% across six

years.

     Even one year's gain will be welcomed by gas producers after years of collapse. But that hasn't

done anything for long-term optimism--in part, perhaps, because it simply enables more production.