HardAssetsInvestor

An Interview With Nicholas Brooks

The head of research and investment strategy for ETF Securities sees good times ahead for commodities ... even livestock.

• Pinch points drive prices higher
• Why oil is supply-constrained
• The main risk to commodities growth

ETF Securities is one of the fastest-growing providers of exchange-traded commodity products in the world. Operating out of London, the group has attracted more than $5 billion in assets in the past year, and now offers over 100 commodity ETCs, including individual commodity funds, leveraged funds, short funds and more.

The company recently brought on Nicholas Brooks as its new head of research and investment strategy. Brooks has spent 15 years as an economist on both the buy side and sell side, and was recently the senior economist and market strategist at Henderson Global Investors.

He spoke with the editors of HardAssetsInvestor.com about where he sees opportunities in the commodities space.

HardAssetsInvestor.com (HAI): There has been a tremendous flood of new assets into the commodities space, and many say this is driving up prices. Is this true?

Nicholas Brooks (Brooks): We're currently preparing a paper on the topic, as it is a major issue in the space that is not going away.

Without having the hard numbers yet, I would say this: It depends on the commodity and the market. In some of the more liquid markets, like oil and gas, the proportion of index-type assets is relatively small compared to the underlying size of the market. In more illiquid markets, there could be more of an impact.

As an economist, however, I would highlight the fact that the price of rice, iron ore and other commodities that do not have liquid futures markets have also been rising ... sometimes faster than commodities that are heavily traded. If investment flows were the only thing driving up prices, you'd expect to see these less-traded commodities lagging significantly behind. But you don't.

It's a strong indication to me that the rise in commodities is not purely investment-driven.

HAI: But do the fundamentals really support, say, oil at $125/barrel?

Brooks: I think the issue with commodities generally and oil in particular is that putting a number in it is very difficult. I don't think anyone is using a valuation model to come up with target prices on these things. When Goldman Sachs mentions $200/barrel oil, they're not doing that based on a valuation methodology. It's a directional call.

When you are trying to get a sense of where prices will go, down or up, you look at the underlying fundamentals. And those are quite price-supportive at this time. Therefore, the idea that prices will continue to rise in the near-to-intermediate terms seems entirely possible.

HAI: How are the fundamentals price-supportive?

Brooks: Very tight supply relative to demand. Everyone knows the demand story, but the big issue right now is that non-OPEC supply has been disappointing. In the past few months, most analysts have revised down their non-OPEC supplies. People think Russia's oil production in the near-to-intermediate term has plateaued. Russia had been the key driver of non-OPEC supply.

With OPEC, there's very little indication that they want to boost supply. I also question whether they even can in the near-to-intermediate term.

I'm not questioning if there are enough reserves in the ground. I wouldn't call myself a peak-oil person. But spare capacity in OPEC is near all-time lows. You have capacity utilization rates above 90%. I think it's difficult in the near term for them to boost supply even if they wanted to.

Unless you saw signs of a very sharp slowdown in Chinese or emerging markets demand, or you saw signs that OPEC was about to substantially boost supply, I think oil prices rising from current levels is very possible.