Commodity Supercycle Calls Grow In 2021

Pump Jack, Oilfield, Oil, Fuel, Industry, Petroleum

It has been an exceptional month for commodity markets, with growing inflation expectations increasing investor interest in the complex. Meanwhile, fundamental developments, particularly in the oil market have only provided a further boost. We still see further upside for oil as we move through the year.

The commodities complex has had its best start to the year since at least 2008, with the Bloomberg commodities index finishing February more than 9% up since the start of the year, while recently the index had been up as much as 12% YTD.

We have continued to see increased investor interest in commodities with the expectation that as we see a global recovery from Covid-19 it will be bullish for commodity demand. In addition, given the loose monetary policy we have seen, coupled with fiscal stimulus, inflation expectations have only grown in recent months, which has increased the attractiveness of commodities for investors, given they are seen as an inflation hedge. Meanwhile, the broader weakness that we have seen in the US dollar for much of the last year has only provided further support.

All parts of the complex have seen a boost in speculative interest, including metals, agriculture and energy. If we look specifically at oil, the managed money net long position in ICE Brent stands at almost 350k lots, levels we last saw back in February 2020, and up around 292k lots from the lows seen in March last year. What is also interesting has been the fact that speculators have been increasing their spread positions in the oil market, and given that the forward curve has flipped from contango to a fairly deep backwardation, this shouldn’t be too much of a surprise, given the positive roll yield on offer.

However, if speculators are buying the oil market, there needs to be someone who is selling it, and positioning data shows pretty clearly that as we have seen the market rally, producers have been happy to hedge into this strength. The producer short position in ICE Brent is the largest we have seen since late 2019. For NYMEX WTI, the producer short has recently been at its highest level since 2017. It is pretty clear though, that this producer hedging in the oil market has provided little resistance to the market moving higher.

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