Investing 101: Why Are Commodity Prices Falling?

Commodities fell nearly to two-year lows last week, leading to some speculation that the massive commodity bull market that started in 1999 might be stumbling.

Why are commodity prices falling? There are three main reasons:

  1. China is cooling down. Commodities are the inputs of all manufacturing processes. As economic activity slows down, so will demand for manufacturing inputs. As demand falls, so will the price.
  2. The U.S. economy is struggling to heat up. Yes, the U.S. economy is recovering, but it has been a sluggish recovery. And as explained by reason No. 1, any slower-than-expected economic recovery will lead to lower demand for manufacturing inputs.
  3. Suppliers of raw materials have overestimated demand for raw materials. As just explained, the economic sluggishness has come as a surprise to most suppliers of raw materials. Since they were overly optimistic, they increased their stock piles too rapidly. Now the sizes of their inventories are bigger than the demand for their raw materials, which further drags down prices.

So which commodity stocks have been dragged down by the bearish sector trends? For ideas, we looked at the RSI(14) indicator and institutional transactions.

RSI(14)
The relative strength index, or RSI, measures the speed and change of price movements. It is often used as a momentum indicator, with a reading that ranges from zero to 100. In general, RSI(14) above 70 signals the stocks are technically overbought (i.e., prices might soon decline), while RSI(14) below 40 suggests the stocks are technically oversold (i.e., prices might soon rebound). In this article we look at oversold stocks with RSI(14) of less than 40.

Institutional buying
Institutional investors are also known as "big money" investors. They manage large pools of money, such as mutual funds and hedge funds. When they invest in stocks, they can invest hundreds of thousands of dollars or more at once. These transactions, called "block trades," can have a significant effect on share prices.

Because institutional investors handle such large amounts of money, it is easy enough to assume that the big money managers know more than the average investor. This is why these investors are also sometimes referred to as "smart money," and why their trades are so closely followed.

Business section: investing ideas
To explore this trend, we created a list of oversold commodity companies that have seen significant levels of institutional buying during recent months. Big money managers seem to think the selling is overdone. Do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Cobalt International Energy (NYSE: CIE  ) operates as an independent, oil-focused exploration and production company. Its market cap is $8.87 billion, with a most recent closing price of $23.29. Its RSI(14) indicator is 28.83. Net institutional purchases in the current quarter amount to 73.4 million shares, which represent about 49.65% of the company's float of 147.84 million shares.

2. MarkWest Energy Partners (NYSE: MWE  ) gathers, processes, and transports natural gas. With a market cap of $5.63 billion, its shares most recently closed at $55.30. It has an RSI(14) indicator of 28.51. Net institutional purchases in the current quarter total 9.8 million shares, which represent about 11.15% of the company's float of 87.9 million shares.

3. Pengrowth Energy (NYSE: PGH  ) engages in the acquisition, exploration, development, and production of oil and natural-gas reserves in the Western Canadian Sedimentary Basin. Its market cap is $2.97 billion, with shares most recently closing at $8.31. Its RSI(14) indicator it 28.18. Net institutional purchases in the current quarter come to 27.2 million shares, which represent about 7.57% of the company's float of 359.38 million shares.

4. Chesapeake Midstream Partners operates, develops, and acquires natural-gas gathering systems and other midstream energy assets in the U.S. It has a market cap of $3.48 billion, with shares most recently closing at $23.72. Its RSI(14) indicator is 29.59. Net institutional purchases in the current quarter total 6.3 million shares, which represent about 14% of the company's float of 45.01 million shares.

5. Hornbeck Offshore Services operates offshore supply vessels, multipurpose support vessels, and a shore base to provide logistics support and specialty services to the offshore oil and gas exploration and production industry, primarily in the U.S. and the Gulf of Mexico. Its market cap is $1.22 billion, and its most recent closing price was $36.03. It has an RSI(14) indicator of 26.97. Net institutional purchases in the current quarter amount to 9.2 million shares, which represent about 30.61% of the company's float of 30.06 million shares.

6. Gulfport Energy develops and produces oil and gas in the Louisiana Gulf Coast. It has a market cap of $1.21 billion, with shares most recently closing at $21.61. Its RSI(14) indicator is 26.74. Net institutional purchases in the current quarter total 2.7 million shares, which represent about 5.46% of the company's float of 49.41 million shares.

7. Central GoldTrust (NYSE: GTU  ) primarily invests in unencumbered gold bullion. Its market cap is $1.14 billion, with a most recent closing price of $59.20. Its RSI(14) indicator is 22.9. Net institutional purchases in the current quarter come to 3 million shares, which represent about 15.54% of the company's float of 19.3 million shares.

8. Approach Resources engages in the acquisition, exploration, development, and production of oil and gas properties in the U.S. With a market cap of $994.58 million, its shares most recently closed at $29.68. It has an RSI(14) indicator of 29.67. Net institutional purchases in the current quarter amount to 3.4 million shares, which represent about 11.15% of the company's float of 30.48 million shares.

9. Newpark Resources (NYSE: NR  ) and its subsidiaries provide fluids management, waste disposal, and well-site preparation products and services, primarily for the oil and gas exploration and production industry. Its market cap is $542.88 million, with the stock most recently closing at $6.22. It has an RSI(14) indicator of 29.82. Net institutional purchases in the current quarter total 4.5 million shares, which represent about 5.01% of the company's 89.9 million-share float.

10. Lone Pine Resources engages in the exploration, development, and production of oil and gas properties in Alberta, British Columbia, Quebec, and the Northwest Territories of Canada. With a market cap of $333.3 million, its most recent closing price was $5.12. Its RSI(14) indicator is 21.76. Net institutional purchases in the current quarter total 51.8 million shares, which represent about 71.09% of the company's float of 72.87 million shares.

Interactive Chart: Press play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Data sourced from Finviz.

Motley Fool newsletter services have recommended buying shares of Gulfport Energy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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