A few weeks ago, Michael Masters, of the eponymous US investment firm, made the point to FT Alphaville that bad things can happen whenever investors mistake the fruits of production for the means of production, and apply long-standing “long only” strategies (more suited to equity index markets) to assets like commodities.
Earlier this month, Nomura put out a note that observed much the same point.
Specifically, they argued that commodities should be treated like currencies and valued with macro-trading tools that incorporate the concepts of carry, value and momentum. Read more
A quick little follow up to our previous “crude wall” post.
It’s worth stressing that since the beginning of the year crude stocks in Cushing, the delivery point for WTI crude futures, have staged a remarkable reversal. Read more
These two charts come from Citi’s commodities research team:
They’re important. The reason being…well, we may have become used to talking about Saudi America, but we haven’t yet figured out the longer term consequences of America’s oil production resurgence. Read more
There are three things that must be remembered when it comes to banks, trading houses and warehousing plays.
But even then, it only pays to store for as long as the commodity returns beat money-market returns. And that means, it only pays to store for as long as someone in the market is prepared to pay a premium for delivery of the commodity tomorrow rather than today. Read more
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.
The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market. Read more
The gold market has always been partial to “carry trades”. But in the post 2008 world the nature of the carry-trade has changed.
In collateral terms, whereas gold mostly traded on “special” terms before 2008 — because you had to pay to borrow it — meaning it was privy to more of a “stock lending” profile, post 2008 it went fully into “collateral” mode. Read more
There’s been a lot of speculation about what really drove the volatile gold price move this month. Some are still defiantly searching for conspiracies or under-handed activities by authorities.
But it’s probably Nouriel Roubini who has provided one of the best and most logical explanations. In his opinion every bit of the gold move can be explained by shifting inflation expectations. Read more
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
Before we comment about the strange behaviour of the Vix this week, we’d like to engage in a bit of a thought experiment.
There are two hypothetical scenarios that we’d like you to consider.
The first relates to the rampant nationalisation of everything:
What happens to market prices and volatility in an economy where government intervention becomes de rigeur every time prices misbehave?
Philip K. Verleger, veteran independent energy consultant, has been doing some sleuthing concerning some of the more opaque areas of the oil market.
What he’s unearthed is interesting, to say the least. Read more
A strange thing is happening in commodity markets.
As we already commented on Twitter, what the physical supply and demand situation is telling us is getting increasingly disconnected from what the forward and futures markets are saying.
The curve, in short, is feeling mispriced. Read more
There’s an enlightening interview with Oleg Deripaska, chief executive of Rusal, in the Telegraph this Monday (h/t Neil Hume).
Turns out the metal tycoon believes aluminium may do better than expected this year, largely because much of the excess capacity that has plagued the industry has finally been cut back. Read more
From the IEA’s latest oil market monthly report:
The paradox is that US product stocks have been falling faster than normal and European refiners have been running flat out despite tepid product demand in both markets. Hurricane disruptions and a string of refinery glitches (especially on the West Coast) are only part of the US story. In both regions, the bottom line is that exports have become a key driver of refining activity and profits, not just the outlet for surplus product that they used to be. To wit, in Europe even gasoline cracks have staged a dramatic recovery, despite vanishing demand at home.
First there was Copper Fingers. Then there was Choc Finger. Later we had The Whale.
What all of these traders respectively had in common (and no, they weren’t all Bond villain rejects) was that they all became the markets they were trading. Read more
A while ago we observed that negative gold leasing rates were potentially signalling something awry with the Libor rate.
That judging by gold forwards, the Libor component of the gold lease rate calculation (Libor-GOFO = Lending rate) was coming in much lower than what might otherwise be expected. Read more
We appreciate that this will not be news for anyone who’s been watching oil markets closely.
However, we still think it’s a valuable recap. Read more
Like us, Reuters’ Robert Campbell has been pondering the paradox of backwardation in an oil market that appears to be plentifully supplied.
We missed his article when it originally came out last week, but think it’s worth taking a late look — especially since it complements our abundance series so well, and supports our views on artificial scarcity in commodity markets. Read more
Investors looking for commodity exposure through fund offerings usually have one of two basic choices. They can opt for pure long strategies via funds which take positions in the underlying physical commodities or which perpetually roll the same position over and over in the futures market, or they can opt for so-called ‘curve placement alpha’ strategies.
Ever since ‘contango’ became a problem for many commodity markets — a structural phenomenon which leads to capital decay over time — the latter strategy has become increasingly popular with investors. Read more
Something of a strange one this. Every analyst and his dog has for the longest while been preaching that demand for crude post-crisis has really been all about emerging market demand… that the US, by and large, has become increasingly irrelevant when it comes to global supply and demand.
Yet, from Reuters last week, we had this: Read more
John Kemp at Thomson Reuters is a big fan of commodity curves — backwardation, contango and all the principles that come with it.
As he often notes, one of the key theories affecting the area is the idea of a convenience yield, initially popularised by John Maynard Keynes. Read more
Whoa…. look at that move in the WTI-Brent spread. That’s at least $4 worth of tightening in less than 10 minutes:
John Kemp at Reuters has penned a cracking column on the current peculiarities afflicting the crude markets.
As Kemp notes, ask anyone in the market — specifically the physical market — and they will tell you the market is tight. Not just tight. Really tight. (And most likely that the recent backwardation reflects this tightness.) Read more
Over in the spot iron ore market… there’s a small case of crisis going on.
As Reuters reported on Thursday, prices have been falling consecutively on “slow Chinese demand” and hefty spot supplies. It’s so bad, Reuters says miners are flooding cargoes into the market just to get the best prices while they can. For now, the price of spot iron ore is still more than double miners’ production costs of around $50 a tonne, so the incentive is quite clear. Read more
It’s only been four days, yet the backwardation in WTI — which caught everyone by surprise on Monday — has already started to ease.
Of course, if it turns out to be this short-lived, the theory that the flip may have been caused by a short squeeze rather than fundamental tightness, becomes easier to imagine. Read more
What flipped WTI so quickly and severely into backwardation?
Increasingly, a consensus is forming that it was nothing more than a short squeeze. We’ve mentioned this before, but here are some more thoughts from the analyst community on Wednesday. Read more
It was quite a day on Monday for the WTI US oil benchmark. The structure of the futures curve finally flipped into a subtle backwardation, seeing the contract join Brent in a formation which sees front month futures trade more expensive to those further out.
The last time WTI was seen displaying a backwardated structure was in October 2008. Read more
How do you actually profit from a contango trade? Read more
FT Alphaville’s three-part series attempting to explain the current backwardation in the market…
…continued. Read more
A heads up — This is a three-part series attempting to explain the current backwardation in the market. We will make three arguments: 1) That contango trades helped to create fake demand in 2009/2010 2) that index funds replaced Saudi Arabia as key swing players, 3) that the Brent-WTI deviation can be explained by the current super-backwardation.
Remember super-contango? Read more
… many funds have stopped buying.
While at first that move might seem logical — they are obviously expressing a bearish view when it comes to future demand — it’s actually another example of how the mechanics of the market see funds damned if they do and damned if they don’t. Read more