In the following Question and Answer session, David Donora, Head of Commodities at Threadneedle Investments, addresses some of the key concerns currently facing investors in commodity markets, and explains his view of the outlook for the market.
What is your outlook for commodities for the remainder of 2014?
David: We are bullish on the macro outlook for the rest of 2014. The OECD countries and in particular North America, the region where economic growth is currently the strongest, and where growth is accelerating, will drive the expansion. Unless there is a significant escalation of geopolitical events we expect global growth to improve. Given that the developed world is leading the global economy, we anticipate that the expansion will be more energy intensive, and less intensive in terms of its consumption of industrial-type commodities, than if it were led by the emerging economies.
Could you elaborate on developments in the energy complex, including how the Iraqi conflict is affecting oil?
David: We anticipate that the price of Brent will remain high at about US$110 to US$115 a barrel by the year end. We also foresee a continuing dislocation between Brent and WTI with the latter continuing to trade at a discount of around US$7-15 a barrel to Brent.
In terms of curves this means that we expect Brent to remain in backwardation, that is to say that the prices for immediate delivery will be higher than the prices for oil five to ten years ahead, and similarly in the short term we recognize that prices for WTI will also be in backwardation.
But as oil production continues to increase in North America, we would expect to see that curve eventually flatten out.
What is your view of base, industrial and precious metals?
David: At the sector level we are positioned in line in base metals, as opposed to oil-based energy where we are as overweight as possible. Although we have a market weighting overall in base metals, we are significantly overweight lead and nickel and underweight copper and aluminum.
In precious metals, we have an underweight stance towards gold and are market weight in silver. Our underweight in gold is not so much a reflection of a bearish view on the precious metal itself but more because we are increasingly bullish on the broader range of commodities and because we would expect gold to lag commodities in general in the current environment. Gold does best when, not only is there geopolitical risk, but also when we have questions about whether the US dollar is functioning as a credible reserve currency. At present it is, given that the US is enjoying relatively strong growth and investment is flowing into the country to fund growing manufacturing and energy production. Thus in 2013, US$200bn of investment flowed into oil production in the US alone.
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