Commodity Investing: 3 Commodity Plays That Could Surge In 2012 (USO, UNG, XOM, DVN, MON, BAL, BNO)

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December 28, 2011 1:48pm NYSE:BAL NYSE:BNO

Jared Cummans: It’s no secret that most commodities had a rough 2011; even top performers like gold have not been without their blips. So when it comes time to examine your portfolio for the coming year, choosing the right commodity can be a tall order. First, it is important to note that no matter


which asset you choose, it will more than likely be volatile and require active monitoring as well as stop-loss protections. But while these investments may be volatile, their benefits to an overall portfolio have earned them the right to makeup anywhere from 5% to 10% of your holdings. For investors searching for the right move for 2012, we outline three enticing commodity plays to help prepare your portfolio for a clean slate after a tough year [see also 12 High-Yielding Commodities For 2012].

Cotton

Cotton was one of the best-performing assets of 2010, with the cotton ETN, BAL, gaining over 95% on the year. After soaring to start the year, prices came crashing back to earth when a number of factors combined to create significant headwinds for the fluffy commodity. Global consumption for 2011 was expected to surge, but unfortunately,  the expected 120 million tons of cotton use was revised down to 113  million after issues in China and Pakistan led to lower demand. As the  need for cotton began to cool down, supplies ramped up all over the  world, a deadly combination [see also Inside Cotton’s Epic Crash].

Cotton prices are currently sitting at their lowest levels in over a year, creating a juicy trading opportunity. While prices have certainly fallen from the mid-year highs, it is important to note that cotton was relatively range-bound between 70-80 cents/pound for the last few years. It could be that cotton is simply correcting itself to a sustainable level, but after watching prices hit $1.30/pound there is also a considerable upside potential for traders. No matter which way you think cotton will move, there are a number of ways to make bet on the commodity.

  • TT Cotton: This NYMEX futures contract allows investors to make a play all the way out to the end of 2013. It should be noted that these are not optionable contracts and their trading volumes can be rather low simply because cotton is not as popular as something like crude oil.
  • Dow Jones-UBS Cotton Total Return Sub-Index ETN (NYSEARCA:BAL): This ETN is one of the most popular ways for investors to make a play on the commodity as it tracks front-month cotton futures.
  • Monsanto Co. (NYSE:MON): This seed maker will present an indirect play on the commodity, but can still offer nice exposure to cotton.

Crude Oil

Arguably the most popular commodity in the world, crude has sunk its teeth into nearly every facet of our daily lives. We rely on crude for energy via fuels, but also for a number of other things like industrial solvents and even cosmetics. Prices for crude have long been gobbling up headlines, but this year saw the commodity take hit midway through the year, as the price of a barrel fell from nearly $115 to just above $75. That represents a loss of nearly 35% in just a matter of months. Now that crude is straddling the triple digit mark, analysts have bold predictions for where its price is going, and most agree that it will rise [see also 25 Ways To Invest In Crude Oil].

The coming year is setting the stage for crude oil to skyrocket based on a number of factors. Tight supplies, rising demands, and instability in a number of the world’s most important producers suggest that crude prices will have some hefty tailwinds for the coming 12 month period. Note that while crude is poised for what appears to be a nice upward trend, it will certainly be volatile along the way. Investors looking to make a play in oil are in luck; crude may  be the most readily available commodity as it has a massive list of options to make an allocation.

  • NYMEX Futures: This trading platform offers a slew of futures to help investors make a play on WTI and Brent depending on which type you feel more comfortable buying.
  • United States Oil Fund (NYSEARCA:USO) / United States Brent Oil Fund (NYSEARCA:BNO): These two ETFs offer exposure to front-month futures on WTI and Brent respectively.
  • Exxon Mobil (NYSE:XOM): While this company could easily be replaced with any number of oil producers, Exxon’s reign as the world’s largest company by market cap makes it for one of the safest and most liquid options available.

Natural Gas

If one were to look at a chart of natural gas prices since the peak of the recession, it would look like a slope that even the most experienced skier would be afraid of. To say the commodity has its back against a wall is an understatement; since its high in 2008, prices have depressed by nearly 73%. The losses for the commodity have been especially harsh over the past few weeks as mild weather and record inventories have kept natural gas below water. Though this is easily one of the most volatile and dangerous commodities, it presents an enticing opportunity for the coming year [see also 25 Ways To Invest In Natural Gas].

Natural gas demand around the world is starting to heat up as we realize that our global dependance on crude oil is not a sustainable solution. One of the most important movers for natural gas will be China, where leaders have chosen to adopt a natural gas strategy in an effort to maintain a cleaner environment. “Demand in China may more than triple this decade, with consumption for  electricity generation increasing more than fourfold, according to the  International Energy Agency” writes Ryan Woo. Natural gas is another commodity with plentiful list of investment options, we outline some of the most popular choices below.

  • NG Natural Gas: These Henry Hub futures contracts, which are also optionable, are the most popular for establishing a futures position in this commodity. One contract represents 10,000 million British thermal units (mmBtu).
  • United States Natural Gas Fund LP (NYSEARCA:UNG): This ETF  invests in front month futures contracts for natural gas and is by far  the most popular fund for this commodity. UNG trades more than 8.5  million shares daily with over $1.3 billion in assets.
  • Devon Energy Corporation (NYSE:DVN): Devon has its hands in just about every corner of the natural gas market and there is a lot of speculation that it will move further into LNG in the coming years. DVN pays out a dividend yield of 1%.

Written By Jared Cummans From CommodityHQ Disclosure: No positions at time of writing.

CommodityHQ offers educational content, analysis, and commentary on  global commodity markets. Whether you’re looking to speculate on a  short-term jump in crude or establish a long-term allocation to natural  resources, CommodityHQ has the information you need.


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