Musings: What Vintage Is Your Barrel Of Crude Oil?

In the world of investing, there have been many studies over the years showing how portfolios diversified across multiple asset classes are the secret to solid long-term investment returns – possibly producing less upside during stock market booms but offering greater downside protection in periods of market busts. It has been this research and the investment success demonstrated by leading college endowment funds practicing this strategy, including the use of commodities, which was largely responsible for the explosion in commodity investing by individuals.

Two economists at the IMF recently examined the performance of crude oil and fine wines and concluded that their price behavior "has shown remarkable similarity"

Two economists at the International Monetary Fund (IMF) recently examined the performance of crude oil and fine wines and concluded that their price behavior "has shown remarkable similarity." The two economists presented their findings in a working paper published by the IMF. According to the economists, "Our results suggest that although fine wine can be considered as an investable asset, its behavior is not significantly different than other commodities and therefore may fail to enhance portfolio diversification."

The research study found that the statistical behavior of crude oil and fine wine prices demonstrated a correlation of over 90% during


the time period studied.  This is interesting in light of fine wine's recent price performance. According to statistics quoted in a news article in the Financial Times, in December the price rise for fine wine was only 1% compared to equities that rose 6.7%, gold being up 2% and crude oil's climb of 8.7%. But overall in 2010, fine wine outperformed all other asset classes for the second consecutive year, up 32% compared to gold, for example, rising only 22%. Research shows that over the past 15 years the average return on fine wine has been 15%.

But overall in 2010, fine wine outperformed all other asset classes for the second consecutive year

The study's authors made the point that "Notwithstanding the continuing debate over the nature of price volatility, a plethora of recent studies has emphasized macroeconomic factors as the main determinants of crude oil prices over the last decade. On the other hand, most empirical research tends to explain the formation of wine prices with supply-side factors such as climatic conditions, grape quality, age effects, and external quality ratings." The two economists' research led them to conclude that global macroeconomic variables also account for the bulk of the variation in fine wind prices, which is similar to the explanation for the movement in crude oil prices.


We found some of the data cited in the study about the wine market quite fascinating. The economists found that per capita wine consumption has been declining in mature markets such as France and Italy while in emerging markets it has grown, albeit from a low base. As a result of that growth, emerging market consumption accounted for the bulk of growth in global demand for high quality, investment grade wine. That demand may also have been helped by income growth and wealth accumulation in these emerging markets relative to the trends in more mature economies.


The two most important conclusions from the empirical results of the study are that demand is the dominant factor in determining the behavior of crude oil and fine wine prices. As would be expected, production constraints have the expected effect on fine wine and crude oil prices. The second conclusion was that aggregate demand growth, especially in emerging markets, is the most decisive factor in determining crude oil and fine wine prices. These are interesting conclusions because within the past week in a letter to the editors of the Financial Times from two Washington, D.C. analysts claims that speculators are primarily responsible for the rise in crude oil prices because they supposedly control $50 billion of institutional money that is projected to flow into commodity indexes this year on top of the roughly $350 billion or more presently invested. I wonder what vintages these investors are buying today.

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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