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Commodity Investment Exodus

September 29th, 2011

OMAHA (Capstone Energy Services) – During the last two months energy futures prices have declined sharply due to the struggling economy and an investment strategy shift by funds and other large non-commercial investors. NYMEX crude oil is off nearly $20 per barrel or 20%, Brent crude $15 per barrel or 13% and gasoline and heating oil both are off nearly $.40 per gallon or almost 15%. Natural gas prices, which are generally influenced more by supply and demand fundamentals than non-commercial investment strategies, also declined sharply, dropping $.75 or 16% during the period.

Energy futures were not the only commodities to see significant declines during the last two months. The Reuters/Jefferies CRB Index of commodities dropped nearly 15%. Some specific examples are: Corn off 13%, Cotton 16%, Coffee 17 %, Gold 16% and Silver 30%. These widespread commodity futures price declines indicate a strategic move away from commodities as an investment strategy, at least in the near term. With U.S. and European economies struggling and growth in emerging market countries slowing, the outlook for a near term extended recovery is diminishing. Fears that excess financial liquidity would cause inflation never materialized and concerns are now focused more on the risk of another recession rather than inflation. As a result, expectations that commodity investments would provide a more favorable rate of return than other investments have materially diminished, resulting in declining commodity prices as investors have moved elsewhere.

Some analysts believe that commodities remain a strong investment strategy in the long run, particularly as the U.S. and World economies begin to recover from the current slow down and experience some sustained economic growth. However, continued high unemployment and the depressed construction industry continue to create an economic drag, reducing the risk of inflation in the near term and undermining the attractiveness of commodity investments. The good news out of this recent reduction in energy and commodity prices is that the lower prices will benefit consumers and industrial end users and should benefit the economy in the short term.

Reports this week of a resolution to the Greek financial crisis resulted in the stock market reversing last week’s big losses and recording big gains. At the same time, crude oil and other commodities prices also moved up sharply. These price gains demonstrate market sensitivity to any significant economic news. However, until there is a clear indication that a strong economic recovery is beginning, energy and other commodity prices should remain soft and may, perhaps, move even lower. Once signs of an economic recovery are recognized, non-commercial investors may again look at commodity futures as a favorable strategic alternative, and when that happens, commodity prices will again rise and possibly very quickly.

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By Ed Freeman

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