The Lessons Behind Oil

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Investors have been taking profits out of practically all sub-sectors of resources stocks, and rotating into commodity futures, principally the energy classes, viz., crude oil, natural gas, heating oil, and coal.

It was on May 20 that the stock price of BHP Billiton topped out, for the meantime, and investors started to rotate billions of dollars in an unprecedented manner, right across the global resources sector, where capitalisation now tops USD 6 trillion. Investors have been taking profits out of practically all sub-sectors of resources stocks, and rotating into commodity futures, principally the energy classes, viz., crude oil, natural gas, heating oil, and coal.

The most interesting feature in this trend is that investors have been selling off listed oil stocks as well. BHP Billiton straddles both worlds; while it is classed as the world's biggest diversified resources stocks, it is principally a mining stock, but, rare for its class, it also operates an oil and gas division. Its stock price is now down more than 15% from its high.

While a number of dedicated listed oil stocks are trading reasonably close to record highs, profits, to reiterate, have been taken off the listed stocks table by investors in the past few weeks. This indicates that during the recent turmoil apparently created by record oil prices, investors have preferred to invest directly in commodities. Commodity futures represent an investment in a physical asset as such, rather than in a corporate entity that carries risks beyond the physical. Such risks include possible dangers of managerial "human error", and geopolitical risk.

This recent trend has also seen investors buying heavily into specialised commodity indices, such as the S&P GSCI Enhanced, which, again, represents a proxy investment into a weighted basket of commodities. By the same token, specialised exchange traded funds (ETFs), which often mimic indices, futures and physical contracts aimed at the institutional market, have been heavily bought in the retail sector.

Thus, while the S&P GSCI Enhanced is currently trading close to record highs, like oil futures, so too is the iShares S&P GSCI Commodity Indexed Trust, an ETF available in US markets. This tracks a broad index of 24 commodities weighted according to the proportion of the commodity flowing through the US economy, the world's biggest. Almost half of the index reflects crude oil; the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals, and livestock...

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