PDBC: The Case For Commodities In December And Beyond

Rising prices and positive percentage price changes of Brent Crude Oil, Natural Gas and Heating Oil on a trading screen for commodities.

Torsten Asmus

Commodity prices peaked in early 2022. Gold reached a record $2072 per ounce high on the nearby COMEX futures contract in March. Soft red winter wheat futures on the CME, the benchmark futures market for the grain that feeds the world, also rose to an all-time peak in March when the price soared to $14.2525 per bushel. March was a busy month in the raw materials asset class as NYMEX WTI and ICE Brent crude oil futures moved over the $130 per barrel level for the first time since 2008. While the petroleum futures markets failed to reach record highs, gasoline did, rising to $4.3260 per gallon wholesale in June, while heating oil futures, the proxy for distillate oil products, reached $5.2217 per gallon wholesale in April. Nearby US NYMEX natural gas futures probed above the $10 per MMBtu level in August for the first time since 2008.

The Invesco DB Commodity Index Tracking Fund (DBC) moved higher and lower with commodity prices and is weighted toward energy. The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) is similar, but investors do not receive a K-1, meaning PDBC can be a more tax-efficient strategy than K-1 products like DBC for long-term investors. The “No K-1” ETF leverage unique tax strategies to avoid issuing K-1 tax documents. Many of these funds invest 25% of their portfolio in a subsidiary that invests in futures contracts while keeping the remaining 75% in high-quality government bonds. The bonds effectively collateralize the futures-focused subsidiary.

If the commodity markets have only paused on the way to higher highs in the coming years, investing in PDBC could be an optimal strategy after prices have declined from the 2022 highs.

Metal prices fall, but the prospects remain bullish

Gold has declined 15.5% from the March $2072 all-time high to the $1750 level, but the long-term path of least resistance remains bullish.

Bullish trend for over two decades

Long-Term COMEX Gold Futures Chart (Barchart)

The chart shows that gold remains in a bullish long-term trend despite the correction from the March 2022 record high. In Q3, central banks purchased nearly 400 metric tons, 300% higher than at the same time in 2021 and a record quarterly amount. Central bank purchases continue to validate gold’s role as a reserve asset.

Elevated silver prices

Long-Term COMEX Silver Futures Chart (Barchart)

Silver at over $21 per ounce remains elevated. Moreover, the silver-gold ratio declined from over 96:1 in early September to the 82.5:1 level on Nov. 29. A falling ratio tends to be a bullish sign for the leading precious metals. Meanwhile, Dr. Copper tends to diagnose the health and well-being of the global economy. Copper is an infrastructure building block, but it has become a critical input for green energy as EVs, wind turbines, and other green initiatives require the metal.

Bullish trend in copper

Long-Term COMEX Copper Futures Chart (Barchart)

After reaching a record $5.01 per pound high in March 2022, COMEX copper futures corrected to a $3.15 low in July. At over the $3.60 per pound level on Nov. 29, the red nonferrous metal has made higher lows and higher highs since the March 2020 low, another higher low dating back to 2008. Goldman Sachs’ analysts continue to call copper “the new oil,” with a price forecast of $15,000 per ton by 2025, which translates to over $6.80 per pound for nearby COMEX futures. Copper supplies are struggling to keep up with the growing demand.

Trend of lower highs in stockpiles

Five-Year Chart of LME Copper Stocks (Kitco/LME)

The chart of five-year LME copper inventories illustrates the pattern of lower highs since early 2018 when stockpiles were over 380,000 metric tons. On Nov. 28, the LME reported stocks stood at 91,200 tons.

Metals prices have corrected over the past months, but the long-term bullish trends remain intact as the markets head toward the end of 2022.

Energy is a mixed picture going into 2022’s final month

Traditional energy prices remain a thorn in the Fed’s side as it fights inflation. While the central bank’s monetary policy can impact demand, supply-side inflation caused by high fossil fuel prices continues to stoke inflation as the world depends on hydrocarbons for power.

Bullish price action and a correction from the March 2022 highs

Long-Term NYMEX Crude Oil Futures Chart (Barchart)

Nearby NYMEX crude oil futures declined from $130.50 in March to the $78.38 per barrel level on Nov. 29, a 40% drop. Meanwhile, at least three factors could mean the energy commodity is close to a bottom at below the $80 per barrel level:

  • The US SPR dropped from 594.7 million barrels at the end of 2021 to the 390.5 million level on November 18, a 34.3% decline. The Biden administration has said the US will look to replace the SPR at $70 per barrel, which could put a significant floor under the energy commodity’s price.
  • OPEC will meet in early December, and the decline could cause the cartel to cut production. Moreover, Russia is the most influential non-OPEC member, with production decisions a function of negotiations between leaders in Riyadh, Saudi Arabia, and Moscow. For Russia, crude oil remains an economic weapon against “unfriendly” countries supporting Ukraine. For the Saudis, years of low oil prices because of US shale production are a reason for the leading OPEC country boosting oil prices.
  • US energy policy remains on a green path, supporting alternative and renewable energy sources and inhibiting fossil fuel production. In the aftermath of the 2022 mid-term elections, a reporter asked President Biden if his administration’s response to losing its majority in the House of Representatives would change any policy initiatives. The President answered that “nothing” would change.

One of the factors weighing on crude oil, aside from seasonal weakness during the off-season for gasoline demand, is the economic weakness in China. Recent COVID-19 demonstrations could prompt the government to lift the protocols, increasing Chinese oil demand, which would likely raise prices.

Oil product prices remain elevated, with nearby January gasoline and heating oil trading at over $2.25 and $3.20 per gallon wholesale. High product prices support crude oil prices in late 2022.

US natural gas is a highly volatile energy commodity that has experienced a $6.39 trading range in 2022. Natural gas prices fell to $1.44 per MMBtu in June 2020 and rose to a 14-year high of $10.028 per MMBtu in August 2022.

Bullish price action in 2022

Long-Term NYMEX Natural Gas Futures Chart (Barchart)

The chart illustrates that natural gas for January delivery at over $7.20 per MMBtu is at the highest price in November since 2008. The 2022 withdrawal season began during the week ending on Nov. 18, with stockpiles across the US reaching a 3.644 trillion cubic feet peak, the same level as in 2021. Moreover, European natural gas prices remain at record highs. Europe depends on Russian pipeline supplies, and Russia is using natural gas as an economic weapon against European countries supporting Ukraine. LNG exports have made US natural gas prices more sensitive to international price trends.

High oil and gas prices have increased the demand for coal, the fossil fuel China and India depend on for power. European prices have exploded because of concerns over Russian natural gas supplies.

Bullish price action and all-time highs

Long-Term Rotterdam Coal Futures Chart (Barchart)

The chart shows that while the price of coal for delivery in Rotterdam, The Netherlands, has retreated from the March high at 257.50 per ton, it remains at an all-time high compared to prices before 2021.

Bullish price action and all-time highs

Long-Term Newcastle Coal Futures Chart (Barchart)

As China and India depend on Australian coal exports, the price of Newcastle coal futures for January delivery at $373.50 remains in record territory on Nov. 29.

The bottom line is the current economic and geopolitical landscapes support higher traditional energy prices over the coming months. While natural gas demand will increase over the coming months, crude oil demand will rise in 2023 when the winter ends and the 2023 driving season begins.

Food prices remain elevated

Grains and oilseeds are the commodities that feed and increasingly power the world as they are critical ingredients in biofuels like ethanol and biodiesel. Nearby March corn futures were around the $6.70 level on Nov. 29, the highest November price since November 2012. Nearby January soybeans above $14.50 were also at the highest since 2012. Nearby March CBOT wheat futures at over $7.80 remain elevated. The war in Ukraine has caused Europe’s breadbasket to become a battlefield, and the Black Sea Ports, a critical logistical export hub, to become a warzone.

Food prices remain elevated, which is another supply-side economic problem fueling inflation that is immune to the Fed’s current monetary policy path.

Energy could have the best chance to surprise on the upside – DBC is heavily weighted toward energy

The bottom line is that raw material prices may have retreated from spike highs earlier in 2022, but they remain highly susceptible to rallies in the current environment. Given the economic and geopolitical landscapes, energy is a sector that could experience the most dramatic price volatility and upside spikes over the coming months.

The Invesco DB Commodity Index Fund is a highly liquid ETF product with around $3 billion in assets under management. The top holdings of DBC include:

Top holdings

Top Holdings of the DBC ETF Product (Barchart)

The chart highlights DBC’s exposure to energy, food, and gold.

PDBC is a no K-1 Strategy that could perform in 2023

The fund summary for the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) states:

Fund Summary

Fund Summary of the PDBC ETF Product (Seeking Alpha)

PDBC invests in the same commodities as DBC but is structured for tax efficiency, and PDBC operates like a bond with a commodity call option attached.

Bullish price action since the March 2020 low

Chart of the PDBC ETF Product (Barchart)

The chart highlights PSBC’s appreciation from $11.08 in March 2020 to the $16.83 per share level on Nov. 29, a 51.9% gain. PDBC reached a peak at $22.73 in late 2021.

I’m bullish on the prospects for energy, food, and metals prices for 2023. The factors that led to the spike highs in 2022 remain in force as we head into next year. PDBC is a product passive investors could consider for adding commodity exposure to portfolios.

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