Chart of the Week

Sources: Bloomberg, Wells Fargo Investment Institute. Daily data: 1/4/2016 – 1/2/2019. Index represented is the Bloomberg Commodity Energy Subindex. Index returns do not represent investment performance or the results of actual trading. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. This chart was excerpted from the Investment Strategy report dated January 7, 2019.

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When we upgraded commodities in September 2018, we suggested avoiding the energy commodity sector. Today, we see energy as the most attractive commodity sector.

Oil and its derivatives (e.g., gasoline and diesel) make up roughly two thirds of the Bloomberg Energy Commodity Index. The remaining one third, natural gas, initially surged to more than $4.60 per million Btu (British Thermal Units) but then fell back to around $2.90, near its starting price of $2.80. As a result of the epic oil price collapse and the round trip of natural gas prices since our September guidance, energy has been the worst-performing major commodity sector by far.

We believe that the oil price collapse has gone too far, and we expect higher oil prices by year-end 2019. Additionally, given the 35% price collapse for natural gas since early December, the risk/reward profile for energy commodities as a whole looks quite attractive to us.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Bloomberg Commodity Energy Subindex is a commodity group subindex of the Bloomberg Commodity Index. It is composed of futures contracts on crude oil, ultra-low sulfur diesel, unleaded gasoline and natural gas. It reflects the return of the underlying commodity futures and is quoted in USD.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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