In the summer of 2008, crude oil prices neared $150 a barrel and governments the world over were talking about how to soften the blow on consumers and curb speculation in the futures markets.

Meanwhile, riots broke out in Mexico over the rapid rise in the price of corn and corn tortillas. And, in China thousands of manhole covers were stolen to be melted down for their base metals content.

But just as the commodities boom reached unprecedented proportions, the subsequent bust has been similarly vicious. As the economic slump deepened in the autumn, global oil demand softened rapidly, leaving the world with a glut of crude. Early in 2009, oil traded under $40 a barrel, barely one-quarter of its highs just nine months earlier. And the prices of all sorts of metals and agricultural products were also hit hard.

The effect on commodity stocks was even more profound. In the first half of 2008, many institutional investors piled into energy and commodity-related stocks. This was one of the only sectors in the S&P that was actually performing well, a sort of port amid the market's proverbial storms. The S&P 500 Energy Index rallied more than +8% in the first half of 2008 while the S&P 500 slumped nearly -13%.

Once commodity prices began to crack in the summer, those same investors began to exit their positions en masse. And as the credit crunch intensified, hedge fund investors were forced to sell their stocks to raise cash and meet redemptions from their clients, exacerbating the decline.

But just as valuations became stretched on the upside amid the euphoria over commodity stocks last summer, current valuations are unreasonably depressed. In early March the estimated price-to-earnings ratios for both the S&P 500 Energy and Materials indices hit more than 15-year lows.

Even better, signs of an upside turn in commodities are emerging and the longer-term trends remain positive. One of the drivers of the commodities boom last summer was strong growth in demand for commodities in emerging markets like China.

While this demand appeared to slacken in the final months of 2008, there are signs of a pickup again this year. For example, U.S. soybean exports to China hit a record in March and there are signs that oil exports to Asia are picking up again. A strong surge in bank lending and a pick-up in manufacturing activity suggest that the Chinese government's fiscal stimulus package is already helping support Chinese economic growth.

And the severe glut in many commodities that plagued prices last year has begun to ease. OPEC has slashed oil production and with crude prices at roughly $50 a barrel, a laundry list of oil projects slated in non-OPEC countries have been delayed or canceled entirely. Global oil production is falling even more rapidly than demand.

Meanwhile, a drought in South America is hitting global supplies of agricultural products. And stocks of base metals are gradually being drawn down as demand from Asia picks up again.

Action to Take --> Investors have an outstanding opportunity to pick up shares of some of the best-placed commodity stocks on the cheap. As the turn in prices takes hold, these stocks are already starting to take off.

-- Paul Tracy

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