How The Western Response To Russia Is Changing Commodities Markets

An aerial photo of an oil tanker.

Alexander Bobrov/Pexels

How The Western Response To The Russia-Ukraine War Is Remaking The World

One of the ways global trade and finance risks being transformed by the Western response to the Russia-Ukraine war is in oil shipping. As Credit Suisse strategist Zoltan Pozsar explained in his latest note, a German boycott of Russian oil would mean that instead of Russian Urals crude being shipped in Aframax tankers (600,000 barrels capacity) on a one-week journey to Hamburg, that oil would have to be transferred to Very Large Crude Carriers (VLCCs; 2 million barrels capacity), a process which itself can take weeks, and then go on a two month cruise to China. However, to keep oil flowing globally at current levels would require 10% more VLCCs than currently exist. And it would also require more financing for commodity traders than currently exists. 

When you take into account similar complications to the transport of other commodities where Russia is a leading exporter (steel, wheat, fertilizer, etc.), it's easy to see how this could boil up into inflationary pressures in the commodities themselves, shipping rates, and everything else that uses those as inputs. So we weren't surprised to see commodity names dominate our top names last Thursday, as we noted in our previous post (You Can Print Money, But Not Oil To Heat Or Wheat To Eat):

Aside from our two top tech names, Tesla (TSLA) and Nvidia (NVDA), the rest of the our top ten fit the following categories. 

  • Steel: Cleveland-Cliffs, Inc. (CLF), and United States Steel Corp. (X)
  • Agricultural commodities: Teucrium Wheat Fund (WEAT) and Teucrium Soybean Fund (SOYB)
  • Fertilizer: CF Industries Holdings, Inc. (CF)
  • Oil and gas: Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X (GUSH), Occidental Petroleum Corp. (OXY), and United States Oil Fund (USO). 

Screen capture via Portfolio Armor on 3/31/2022.

In this post, we'll offer two quick follow ups. The first is a response to a reader question, about how some of our top names listed above could be held in a hedged portfolio. The second is recording of Zoltan Pozsar speaking about Bretton Woods III with Yra Harris last week (thanks to commenter "spekulatn" for sharing this). 

A Hedged Portfolio Built From Those Top Names

Here's what a hedged portfolio based on our top names from Thursday looked like, for an investor looking to put $3 million to work without risking a decline of more than 25% over the next six months. 

Screen captures via Portfolio Armor on 3/31/2022.

A few quick notes on this hedged portfolio: 

  • Every position is hedged against a >25% drop, in one of two ways. Our system uses an algorithm to determine whether it makes sense to hedge with an optimal collar (where the upside is capped as shown in the "Cap" field) or with optimal puts (where "None" is shown in the "Cap" field). 
  • The net hedging cost of this portfolio was negative, meaning you would have collected a net credit of $65,000 when placing these trades.
  • Although this portfolio was done for $3,000,000, the system works for dollar amounts as low as $30,000.

Now let's hear from Pozsar. 

Zoltan Pozsar Speaks To Yra Harris About Bretton Woods III

Thanks to reader "spekulatn" for sharing this in the comments of our last post.  Video length 01:09:04



Disclaimer: The Portfolio Armor system is a potentially useful tool but like all tools, it is not designed to replace the services of a licensed financial advisor or your own independent ...

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