Commodities

The notion that certain commodity prices are destined for permanently higher prices (“they’re not making any more oil…or land”) is likely to be proven false. After all, newspapers have carried stories about oil shortages since the early 1900s. The first large oil field in Pennsylvania resulted in oil selling for $20 a barrel, well over a hundred years ago. A year later, the price dropped 99.5% to 10¢ a barrel due to new discoveries. 

 

Typically, energy dominates commodity markets and generally represents roughly 80% of the value of all commodities traded (since currencies are not considered a traditional commodity and not included in most indexes). This means capitalization-weighted indexes are heavily influenced by energy prices.

 

According to a Wall Street Journal March 2011 article (when oil was $100 a barrel), “Adjusted for inflation, the price of oil has tended to go down, not up.” During the Civil War, a barrel of oil cost $168 in 2011 dollars. At $100 a barrel and adjusted for inflation, oil was just 4% higher in March 2011 than it was at its January 1981 peak. Over the past 30 years, the inflation-adjusted average annual gain for oil was 0.014%, an annual return much lower than money market funds.

 

The S&P GSCI Total Return Index reflects returns from 24 physical commodity unleveraged contracts plus the T-bill rate of interest earned on funds committed to the trading of the underlying contracts; the index is weighted as follows: 68% energy, 17% agriculture, 8% industrial materials, 4% livestock, and 3% precious metals. The index does not reflect any expenses or costs. The S&P North American Natural Resources Sector Index (63% oil and gas, 18% energy equipment, and 15% in metals and materials) generally corresponds to the returns from ~ 150 U.S.-traded natural resource-related stocks.