Fibres beat hydrocarbons

Amid the warnings about energy price inflation, the humble cotton fibre has seen the biggest price rise among listed funds.

With continued focus on political upheaval in the Middle East and other regional factors, such as the devastating earthquake that hit Japan – the world’s third largest economy – going long on oil and gas will have seemed a sure bet on the price of oil and natural gas going up.

The counterbalance, of course, is that the price rise is driven by supply chain concerns, rather than the world running out of oil in the short term.

As a result, oil companies and their shareholders may not be able to take advantage of such price rises if they are unable to actually deliver the hydrocarbons being tapped out of the ground. They cannot sell downstream what they can’t get on to oil tankers or into pipelines to big consumers in the West and elsewhere.

Cottoning on

This debate may be a moot point for followers of listed funds. The fact is it is other areas that have provided some of the most exciting returns amid the continued sharp volatility of both hard and soft commodities in recent months. In particular, cotton has performed.

It is interesting to note that a short gas play has not seen its returns drop off in recent weeks, which otherwise would be expected if the long price was heading upwards.

The ETFS Leveraged Cotton made 159.1% euro-based gross return in the three months to 4 March. It has risen by more than 443% in 12 months.

The fund looks to change its price by 200% of the daily percentage change in the DJ-UBS Cotton Sub-Index, accruing a daily capitalised interest return. This London-listed fund is passported into the Netherlands, Germany, France, Italy, Denmark, Sweden and Spain.

Longer term, the volatility in oil and gas markets has delivered a better story centred on investing in gas. The answer the data suggests to investors is that they should have bet on volatility in the gasprice in the past three years, but gone long on cotton in recent months.

Although looking ahead, it is less clear which commodity area will provide better results for investors in listed funds, but the market does provide some clues.

The ProShares Ultra Oil & Gas listed fund dropped by almost -31% in the three years to 4 March. This fund looks set to make 200% of the daily performance of the DJ US Oil & Gas Index.

However, data for the past three months suggests investors believe better long returns are ahead, the level of stock on loan has started to fall, and the price of the instrument has been going up.

In an update on the Libyan supply disruption on 10 March, the International Energy Agency said: “Crude exports from Libya have slowed sharply in the last week, to well below the 500 kb/d reported last Friday, as conflict has intensified. Oil infrastructure appears to have been damaged following bombings around Es Sider and Ras Lanuf in recent days, heralding a worrying escalation from an oil-sector perspective.

“So far, the physical-market impact of events in Libya has been cushioned by seasonal refinery maintenance, and European refiners – the main customers for Libya’s crude – have said they remain well-supplied for the time being. “The IEA continues to monitor the situation on a close and constant basis, ahead of a seasonal uptick in crude oil and transport fuels demand expected from April onwards.

“It stands ready to act if the disruption of supplies proves acute and ongoing, and if suitable replacement supplies cannot be made readily
available by other producers.”

In other words, expect cotton to possibly continue its run, but don’t discount the return of stronger performances by oil and gas ETFs in the coming months

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