Despite High-Flying Oil Prices, Commodities as a Whole Aren't Expensive

 | Apr 14, 2018 | 12:00 PM EDT
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The crude oil bulls have likely gotten a little ahead of themselves, but traders should recognize that despite high-flying oil prices the commodity complex is still relatively cheap. There are a handful of commodity index sources available, most of which overweight oil causing them to appear inflated at the moment, but a quick look at the better diversified Bloomberg DJ-UBS index, suggests commodities appear to be relatively attractively priced. Thus, perhaps the best plays on the board in 2018 will be those which cater the upside in the likes of agriculture, industrial metals, meats (cattle and hogs), and perhaps even natural gas.

The Bloomberg DJ-UBS commodity index is hovering near 87.00. To put this into perspective, the index peaked near 140.00 in 2014 and at the apex of the trough in 2016 was valued near 72.00. Although we are not necessarily calling for a return to the high-130.00s, it is reasonable to assume commodities have more room to move on the upside than they do to the downside.

Source: MRCI

Further, a step back to look at the bigger picture supports an even more compelling argument. The out of control commodity rally in 2007/2008 led the index into the 240.00s! We don't expect to see that type of exuberant pricing any time soon, but it certainly leaves the door open for the possibility of a sharp rally. After all, the Bloomberg Commodity Index is trading at roughly 35% it's 2008 value. It can certainly soften from here, but the real price volatility risk is on the upside.

Source: MRCI

If you are wondering why this particular commodity index is trading at a bigger discount that similar indices, it is because the Bloomberg index doesn't assign crude oil an abnormally high percentage of the allocation. The energy complex accounts for about 37% of this index, but it includes natural gas, Brent crude oil, heating oil, and gasoline. Accordingly, WTI (West Texas Intermediate) crude oil in the U.S. does not have an overwhelming impact on the index.

Agricultural commodities such as soybeans, corn, sugar, cotton, wheat, and coffee comprise of 28% of the index value, industrial metals account for 17% and precious metals and livestock make up the remainder. Scouring the boards, it appears the most depressed commodity sectors are the grains, meats, and industrial metals. Cheap markets can potentially become cheaper, but commodities seem to have put in a floor.

This column originally appeared Friday morning on Real Money Pro, our premium site for active traders and Wall Street professionals. Click here to get great columns like this even earlier in the trading day.

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