Commodity Valuation

Finally, we seem to be seeing a significant supply response to low commodity prices, with plunge in investment in future production of commodities right across the wider complex

Commodity demand is picking up.  In crude oil for instance the current market over-supply of around 1.1 million barrels per day will disappear by H2 2016, even with pessimistic assumption around current over-quota production by OPEC.  Demand may even surprise on the upside, China vehicle sales have moved from negative year on year growth to the current +7% year on year growth.  Latest US auto sales are up 6.4% year to date.  US miles traveled are growing at 2.9% year on year  - the fastest rate since 2000. 

A slow down in China is commonly blamed for commodity weakness, yet demand growth has been solid.  The problem for oil is supply, not demand, and the current low prices are the cure for that: 

The following chart shows the relationship between commodities (as measured by the S&P GSCI) and equities (as measured by the S&P500).  That relationship is at historic lows:


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