Is the Commodity Bull Market Over?

We are in the midst of a pullback in commodities and their related stocks. Is this the end of the bull market in commodities? I think not.

The commodity bull run is a multivariate model. One variable was the foreign exchange factor. As the dollar weakened, the price of commodities in dollar terms rose. This past week the dollar strengthened after the market interpreted the most recent FOMC statement as sending a signal that the monetary body is likely to end its most recent cycle of interest rate cuts.

However, foreign exchange is only a part of the commodity story. Global demand outside of the United States is driving the commodity bull markets and will do so for many years. Oil demand is rising by 3% or more a year while production is flat to declining slightly. Ethanol production is taking much needed grains out of production, driving food prices higher. Global construction is utilizing increasing amounts of metal and steel. This is not going away anytime soon. Furthermore, if the attempts to reinvigorate the US economy are successful then commodity demand will rise in the US once again.

This does not mean that the commodity related stocks won’t pull pack. They should and they will. However, don’t confuse some profit taking for a change in character of a long term trend.

Once this pullback is over I will be looking to expand my natural gas exposure. Potential candidates for new positions are Chesapeake Energy (CHK) and Southwestern Energy (SWN). I would also consider adding to existing smaller positions that I have for Helmerich Payne (HP) or Devon Energy (DVN). As I am in no rush I can afford to wait and do more research while prices work their way lower.

Disclosure: At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of DVN and HP --- although positions can change at any time.

Comments

[zenalgorithm]

Commodities typically start to decline fast at/just after the apex of a recession. When the FED begins to actually raise rates - watch out below.

A lot of oil analysts see permanent demand destruction occur when gas is +$5/gallon. I see gas staying between 3.5-4.5/gallon this summer. Oil seems toppish at $120-140.

Here's a potential gas killer solution, using an ultra-capacitor:
www.autobloggreen.com/.../

[Lg71050]

Mr. Rothbort is exactly right on this issue. Too many Americans still think of supply/demand in strictly American terms. We aren't driving the bus anymore.

[Clearlead]

yep, for those with any long term outlook, natural gas is a buy.

[richjoy]

Mr. Rothbort is far more likely to be correct in his assessment than he is to be wrong. Thus, I too continue to view the present correction (or is it over already?) as a buying opportunity.

Also, I echo lg71050 -- commodities are a global story; also it is much bigger than Chindia, look at Latin America, Eastern Europe, Southeast Asia (and soon Africa). People everywhere are more aware of what Americans and Europeans are eating, wearing, driving, and doing; they want the good life, and think they deserve it! Look for accelerating growth in infrustructure investments (steel, cement, electrical/electronic equipment, chemicals/fertilizers, and fuels.

[mkreisel]

A single bus can easily pack 50-100 people.

A single train can easily fit 1000 people.

[Tom Lindmark]

Just a thought and a question. To what extent is the commodity boom a bubble? I know all the arguments for a continuation of the boom, global growth, etc. But I heard the same things in 2000 about the tech market and then again about the housing market. Starting to get just a little gun shy here.

[curious cat]

dear tom,

what happens when they give a boom and no one comes? people in every country have to eat, but after that, they will buy only if the price is right. our buyers are fast disappearing and we have a lot of wealth in this country. it's possible that other countries will subsidize their buyers, the way china does, but eventually people cut back and prices go down. this commodity boom is a bubble, wait until you see the unemployment rates go up and your relatives start begging for loans. at that point, they won't be able to give copper away. you can buy some then. when bushels of corn are $2.00 again, you can buy corn, when rice is being thrown at weddings, ....

[User 54066]

What the hell are people talking about;commodity bull market over ??? Even if oil goes back to $70 a barrel, the oil company's are still making a fortune !!! The shorts are just wonderful people trying to make a buck & reverse the trend; that's all !!! Did the amazing growth around the world just drop to 3% FROM 10% ; DON'T THINK SO.......

[ElliotMiller]

And in terms of infrastructure growth in the emerging markets, don't forget that asphalt is petroleum based.

[StateofConfusion]

It use to be tha the major part of food and materials were consumed in the US and Europe. With China and India and world population exceed sustainable limits, commodities will not keep up. Anything that runs up fast is in a mini bubble but food, metals and energy will have a long demand curve.

If anyone cares to save the US from a population explosion, you had better try to greatly slow immigration now. That is only one problem but an important one. A silver lining is high oil prices will finally drive us to renewable energy (once Bush is gone) but replacing oil is a long term goal. Geothermal is one very good route. Check out RZ and NGLPF and there are others.

[phillips49]

I'm interested in investing in businesses that have a solid requirement for their products, the ability to pass on increased costs, and high prospects for growth.
For me, the oil and natural gas companies, the mining companies, the infrastructure companies, the agriculture companies, and the businesses that support these kinds of companies satisfy these requirements.

Continued growth in demand for these resources in undeniable... and they are not making any more of the stuff.

This far more than can be said for financials or many of the other sectors for that matter. Traders will come and traders will go, but the requirement for basic materials and services remains the same. From a price earnings standpoint they are still reasonably priced, so I fail to see a tech type of bubble in these assetts. I'm long.

[chistletoe]

So long as crude oil has a finite supply
but US dollars have an infinite supply,
the price of oil will continue to rise.
ditto natural gas.
there's really no room for debate.

[Peezi]

CHK pulled back just last week from $55 to $48 and change, that was your pullback and you should have bought it there. I've had heavy exposure to NG for years and it is finally paying off. In fact based on the price of NG, compared to the price of oil and compared to the price of it in other countries, its very undervalued. The US Dollar does not move NG either since it is a local commodity only, meaning we don't import/export it. What moves it is usage, domestic supply, weather, and to a lesser extent, the price of related energies, namely oil. Some will say that the shoulder season is beginning so NG is due for a pullback, I say its undervalued so no pullback will happen this year and if we see an active hurrican season in the Gulf of Mexico this summer it will definitely skyrocket.

[CommodityBubbleproponent]

We haven't topped out yet. But we're getting close.

Some interesting signs:

1. Iran has doubled the amount of crude oil sitting in tankers waiting to be delivered, creating a ship shortage (20 million barrels as of today). If demand was so hot as everyone is claiming, that should be gone.

2. Saudi Arabia just cut it's benchmark discount on all of its varieties of crude. Why would they do that if the demand was as hot as everyone claims? (source: Bloomberg)

[CTProgrammer]

I bought CHK back in February at $45 when Jim Jubak on MSN started talking about Bush's stupid energy policy. Back in October 2007, before the you know what all hit the fan, you could have gotten it in the high 30's if you'd had the insight. Gas will be what keeps us going in the interim between high-priced oil and mainstream "alternative"... energy. I remember when people were screaming about gasoline hitting $2, like it was outrageous, and the entire economy was going to suffer, truckers would go out of business, etc.. Same at $3. Here we are approaching $4. Does anyone else see a trend here? Oil will keep going up. Period. This isn't OPEC or any given country manipulating the market. Oil is scarce, and getting scarcer. Gas is the next wave of affordable energy. As soon as there are cross-country gas pipelines (most of them are just regional now), gas will be the cheaper source. It' so cheap in Utah that natural gas vehicles drive at the equivalent of 60 cent per gallon gasoline. I'm on an oil furnace for my home right now, but as soon as it goes I'm replacing it with gas.

[eric hart]

Agree with CT Programmer--gas is a great buy right now. See Mcdep.com with Kurt Wulff
and his current insights on the great value in natural gas.

[J.Bass]

Take a look at the small nat gas producers in Canada :
Trading on Toronto
Birchcliff Energy ( BIR)
Vero Energy ( VRO)
discaused on trading days at amprogram.com

[DaveinHackensack]

If you are bullish on natural gas, consider TIRTZ.OB. That royalty trust gets about 85% of its royalties from natural gas, the rest from oil.