Who Has Been Outperforming Whom in the Commodity Space?



Energy rallied the most in the commodity space

Between 1996 and 2005, the energy index (XLE) (XOP) rallied the most within the broader commodity index (DBC). The S&P 500 Sector Energy Index GICS Level 1 (FENY) (VDE) rallied by ~201.6%.

The CTRB Bloomberg Commodity Index (BCOM) rallied by 62.9%, while the agricultural (DBA) sub-index fell by 50.4% during the same period. Broader macroeconomic events impacted the movements of the commodity index during this time.

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Energy during the Asian financial crisis

Crude oil prices rallied by 208% between 1996 and 2005. During 1998, crude oil prices started to fall. At the same time, OPEC (Organization of the Petroleum Exporting Countries) decided to increase its production by 10% to around 2.5 Mbpd (million barrels per day) more.

As crude oil (USO) (UWTI) (BNO) is a growth-driven asset, the slowdown in Asian economies during the Asian financial crisis and the oversupplied crude oil market led to a downturn in crude oil prices.

However, following oil’s downturn, OPEC decided to cut its production limit by 1.3 Mbpd and 1.3 Mbpd in April 1998 and July 1998, respectively. Prices started to recover in early 1999.

Energy rally

In March 2003, the US crude oil inventory reached its 20-year low of 2.7 million barrels. This resulted from coordinated production cuts by non-OPEC members such as Russia (RSX). The oil inventories of OPEC countries were also at lower levels, resulting in a rise in crude oil prices. Hence, the energy index gained the most within the broader commodity index.

Increasing demand in emerging markets (EEM) (VWO) fueled growth between 2003 and 2007. Demand in emerging economies—especially in China (MCHI) (ASHR)—boosted the commodity index.

In the next part of this series, we’ll analyze the performance of the US Dollar Index during 1995–2005.


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