Commodities aren’t turning higher any time soon according to Credit Suisse

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Commodities of late have had a pretty rough time with the S&P GSCI Index Spot commodity index down 10% in the last year. Oil has suffered even more with Brent Crude dropping 15% in the last 12 months to $91.5 and from a 12 month high of $125 in February 2012.


The spread between the Brent oil futures contract for August and the September contract narrowed to a contango of 4 cents a barrel earlier this week. The spread between September and October flipped into backwardation due to the Norweigan oil workers strike which has shut down 240,000 barrels per day, or 15%, of the country’s oil production, and 11.9 million cubic meters per day, or 7% of the total. Spreads from October into December were flipping between backwardation and contango in the last few days meaning that the likely future spot price and current spot price are similarly priced.  

Reuters reported that “The strike has certainly curtailed the bearishness and probably forced some short covering in an oversold market,”“But in a normal market, spreads must have been a lot stronger,” he said, adding physical demand for crude oil has been weak.”

Contango is when the futures price is above the expected future spot price. The future price will ultimately converge on the expected future spot price. Contango implies that futures prices are falling over time as new information brings them into line with the expected future spot price. Normal backwardation is when the futures price is below the expected future spot price.

Oil Storage tankers, if full, hold about 26 million barrels worth about $1 billion, traders did particularly well out of contango in 2009 by storing oil in Cushing, Oklahoma, for delivery against Nymex WTI (West Texas Intermediate) Oil contracts or hired super tankers to hold oil offshore.

The cost to store crude at Cushing averages about 30-40 cents a barrel a month, and supertanker storage would cost about $1 a barrel per month for storage

Brent crude has been more volatile than American WTI crude because there are actually four different types of grade that make up the physical Dated Brent blend: Brent, Forties, Ekofisk and Oseberg (BFOE). And the reason for that is mainly because volumes of the Brent original have been diminishing with declining production rates. Because Forties is the cheapest to deliver, Forties sets the price for Brent. The pipeline via which Forties is delivered is now also carrying another crude stream called Buzzard, which has more sulphur than Brent, in other words more sour. reported this week that commodities analysts at Credit Susisse plannied to update their price forecasts for gold, oil, copper and other raw materials in the next few weeks, but they’r already signaling that any big run-up after a recent sell-off appears unlikely.

Rick Deverell, global head of commodities research, said their cautious outlook boils down to the approximately 3.5% global economic growth rate expected for the second half of 2012.  Such a tepid expansion rate “normally means flattish commodity prices,” Deverell said.

On the oil front,  Deverell indicated he may not be quite as bearish as a recent Raymond James call for an average of $65- a-barrel for West Texas Intermediate crude in 2013. But he doesn’t see Brent crude or WTI straying far from current price levels of about $80 and $93 a barrel, respectively.

Oscar Bleestein, head of institutional commodities sales for the Americas, said more than 320 investors attended a day-long meeting on commodities this week, a sign of strong interest in commodities as an asset class. But after a drop in prices this year due in part to the European debt crisis, there’s currently a “huge amount of sidelined cash.”

In a survey of attendees’ commodity favorites in the energy sector, about 47% said natural gas offers the best 12-month outlook for price gains, beating out 28% in favor of crude oil, 16% for oil products, and 10% for coal.

Looking ahead, Credit Suisse said investors could gain by selecting specific commodities that could outperform others. Meanwhile, the bank will look to meet strong investor demand for products that offer the ability to shuffle long and short commodity positions in a so-called alpha strategy modeled after hedge funds.

Contrarian Investor UK

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