Pension funds rush back to commodity indices-Lehman
Mon Jan 29, 2007 11:03 AM ET
NEW YORK, Jan 29 (Reuters) - A rush of cash into commodity indices by pension funds last week helped rally oil prices and could add $25 billion to passive investment strategies this year, Lehman Brothers said in a report.
The investment surge helped U.S. oil prices jump over $55 a barrel last week, after dropping to a 19-month low of $49.90 earlier in the month due to warm U.S. weather and a shift in speculative strategies by some investors, Lehman Brother said.
"Prices have rallied 7 percent from their lows last week as pension funds with 2007 commodity allocations finally entered the market in a big way, investing in indices including the Lehman Brothers Commodity Index (LBCI) and the Goldman Sachs Commodity Index (GSCI) during the week," said the report dated Jan. 26.
Analysts earlier this year said some investors had cut their exposure to passive commodities indices, which were facing loses through their simple long-only strategies.
The long-only indices sell front month futures contracts for second month contracts at a set time each month. The strategy earns profits when the second month contract is cheaper than the contract being sold, and faces loses when the later months are more expensive.
While front month futures have mostly been trading at a discount to the second month since 2004, Lehman Brothers said indices could see a rise in investment throughout this year which could push oil prices higher.
"We still see upside price potential from passive investment into commodities and assess that $25 billion could enter the market this year," said the report, which was released late Sunday.
Pension funds often buy into commodity indices to offset risks in their portfolios from investments in other asset classes such as equities.
Colder than normal U.S. weather through the rest of January should also support crude oil prices, the report said.
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