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Oil, Commodities & Baltic Dry Index

February 8th, 2015 · Greg Atkinson · 1 Comment

The long expected commodities sell-off is still a work in progress with many of the commodities bulls from just a year or so ago now covering their tracks by making ultra-bearish predictions. But let’s bypass the usual hype in the mainstream finance media and focus on some trends and commodity price charts to see if there are any signs the correction may be easing.

The slump in the price of oil has certainly caught investors attention and you have probably heard quite a few people talking about oil hitting a low of $20 USD a barrel which is the sort of prediction a primary school child could make. That figure is not one derived from the careful analysis of oil market fundamentals but is simply the lowest price oil has hit (approximately) since 2000 as can be seen from the chart below.

 

oil_price_2000_2015_chart_feb_2015

Yes picking the most obvious lowest point on a chart passes for analysis in the mainstream finance media – scary but true.

I will only make a couple of observations about long term oil prices. Firstly the trend despite some very severe corrections is upwards and secondly after a major sell-off the price recovers – not always fully, but enough to make a tidy profit if investors can buy at the right time.

Of course picking when the oil price has bottomed out involves some skill and quite a bit of luck, however my view is we are close to that point now. Yes the price may dip below $40 but I reckon there is enough upside potential to make investing in oil and energy related stocks worthwhile. But let me stress, this is not investment advice and there is quite a good chance I will be wrong!

oil_price_1_year_chart_feb_2015

The one year oil price chart above suggests a bottom in the price may be forming but this could easily just be a pause before the price tumbles again. Remember buying low and selling high is the way to make tidy profits, but getting the timing right is not so easy.

Overall we can see that commodity prices peaked a few years ago and it was back then that I was warning that a major correction was brewing. I didn’t get the timing precisely right, but I was able to exit my long position in BHP Billiton when the stock was about $40 and I recently moved back in when the price was around $28.

 

rba_commodity_prices_jan_2015

This could turn out to be either a very good move or it may be that I have jumped back into commodities too early. However my view at this stage is that over the longer term (around 5 years or) commodity prices will recover.

 

australian_long_term_gdp_growth

If and when commodity prices do recover this should help support GDP growth in Australia but the above chart is worrying since it shows that Australian GDP growth has been sliding for around a decade. Meanwhile house prices and wages have been trending the other way so I will leave it to reader’s to decide if those trends are sustainable.

As I have written now for many years the Australian economy is unbalanced and although it has not undergone a recession, I don’t think it’s in  particularly good shape from a fundamentals point of view.

Now onto a favourite global economic indicator of mine – the Baltic Dry Index.

Baltic Dry Index (BDIY) 5 Year Chart

bdiy_5_year_chart_feb_2015

(Source: Bloomberg)

The Baltic Dry Index (BDIY) is currently around 559.00 which is lower than I expected it to go and the lowest it has been since 1986.

For years I have been talking about this index and suggesting it was telling us that global economic growth was sluggish at best. I have also regularly mocked the growth forecasts made by the RBA, IMF & OECD which have over the years been proven incorrect and have regularly been revised down.

During that time analysts and assorted market “experts” have basically ignored the Baltic Dry Index since in their view it is unreliable. The reality is however that it has been their calls that have been unreliable and the weakness reflected by the BDIY has indeed been reflecting what was happening away from charts & PC screens.

I must stress however that the Baltic Dry Index is just an indicator and not something I would base my trading decisions on alone. There are many factors that move this index and so it can be quite volatile over the shorter term. But as I have stressed many times – it is worth watching!

Finally please remember I am not in the business of handing out trading advice nor do I suggest anyone base their investment decisions on my views.  My small moves back into commodities and energy stocks are risky and there is absolutely no guarantee those trades will return a profit.  So as always if needed, please seek professional (and reliable) advice before making any investment decisions.

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp


1 response so far ↓

  • 1 lachlan // Feb 21, 2015 at 9:52 am

    I am looking for a resumption in the falling AUD next week Greg and timed with a new spike up in the USDX. Gold prices have pulled back to support so could bounce and as a holder of the yellow metal I hope AUD gold moves past it’s recent high. I will trade some Au for some Zn(zincalume) if it gets around 1800. Wanna build a giant shed. All Australian boys need a giant shed, eh ol mate! 🙂

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