Commodity Bull Cycle Seen Rising From Ashes as Oil Bottoming

Set up in 2005 at the dawn of an unprecedented boom in raw materials led by demand from China, the Schroders commodity fund grew to become the biggest of its kind, according to Blanning. While the market selloff and investor redemptions have eroded asset valuations, the outflows have slowed, he said.

“The correction has gone way, way beyond where we thought it would. It’s overshot,” he said. “The U.S. dollar strength is a big factor. The next turn for commodities to rise may have already started and it can go up very fast.”

While the dollar has been benefiting from the Federal Reserve’s decision in December to raise borrowing costs for first time in a decade, further rate increases face headwinds from turmoil in financial markets, China’s slowdown and disappointing U.S. earnings. A reversal of the stronger U.S. exchange rate would help spur demand for commodities denominated in dollars by making them cheaper for those holding other currencies.

Schroders is positive about oil and gold, but cautious on industrial metals due to concerns about consumption of those raw materials in China. Oil at $27 a barrel isn’t sustainable when producers are losing money, the fund manager said.

“We think the supply and demand is really changing now,” Blanning said. “Particularly among the shale oil producers we’re going to see a drop in production. I think we have turned the corner. It’s exhaustion. A new cycle in commodities is starting."

--With assistance from Jesse Riseborough.

To contact the reporters on this story: Agnieszka de Sousa in London at atroszkiewic@bloomberg.net; Sarah Jones in London at sjones35@bloomberg.net To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net; Neil Callanan at ncallanan@bloomberg.net Tony Barrett