the current dynamics of commodity markets€¦ · the current dynamics of commodity markets ... ,...

Thecurrentdynamicsofcommoditymarkets

Jean-FrançoisLambert

LondonBusinessSchool– 05th October2017

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DynamicsofCommodityTrading

1. Commodities:theessential

2. Thekeydriversin2017

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1. Commodities,theessential

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DynamicsofCommodityTrading– CrashCourse

• Commoditiesare theessentials

• Commonfeatures

ü Strategicbynature

ü Eachwithauniquenature

ü Marketprice

ü MostlytradedinUSD

ü Futuremarkets4

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• Whatisthesizeofthecake?

ü 4.5TrillionUSD

ü 25pct.ofworldtrade

• Howtoassesstheweighofthe3sectors?

ü Byvalue?Byvolume?

ü Onelead:Weightintrade(RICI)


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Agricommodities(aka“Softs”)

• Cereals:ü Grains:Corn,Wheat,Barley,ü Rice

• Oilseeds:ü Soybean,PalmOil,Rapeseed

• OtherSofts:ü Cocoa,Cotton,Rubber,Coffee,Sugar

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IdiosyncrasiesofAgriCommodities• Demandisforeseeable

ü Demographyü Urbanisationü Foodhabits

• Supplyisthedrivingfactor

ü Climateandenvironmentü Cropsdiseasesü Researchü Policies

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• Whendeflated,FoodandAgrisubindexes,are flatoveralongperiod

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Metals(andminerals)

• BaseMetals(RawcommoditiesandIndustrialMetals)

ü Raw:IronOre,CokingCoal

ü Ferrous:Steel,FerroChrome

ü NonFerrous:Copper,Aluminium,Nickel,Zinc,Lead,Tin

ü MinorMetals:Cobalt,Lithium,Magnesium,Titanium…

• PreciousMetals

ü Gold,Silver,Platinum,Palladium9

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IdiosyncrasiesofMetals• Demandisthedrivingfactor

ü Economicdevelopmentü Urbanisationü Emergingmarketsü China

• Supplyisdrivenbylongtermtrends

ü 5-7yearlagtimefrominvestmenttoproductionü Noforeseeable“peakmineral”phenomenonü Technology

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• China’soverwhelmingposition incommoditydemand

Source:HSBC

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Gold:commodityand/oraquasicurrency

• AmirrortoUSD

• AGeopoliticalbeacon

• Akeyplayforcentralbankers

• Yet,physicaldemandisstronginIndiaandChina

• Andlikeotherpreciousmetals,atechnologicalplay

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LambertCommodities Sources FinViz 13

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• Goldisthebesthedgeagainstconflicts

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SourcesCapitalEconomics


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Energy

• Coal

• NaturalGas(conventional,unconventional,liquefied)

• Oil(conventionalandunconventional)

• RefinedOilproducts

• Ethanol

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IdiosyncrasiesofEnergyCommodities

• Oilisthekingofcommodities

ü Thebulkofcommoditytrade

ü Themostliquidmarketü Dominantweightinvariousindexes

ü Thepriceofotherenergycommoditiesishighlycorrelated

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IdiosyncrasiesofEnergyCommodities(2)

• ASupplydrivencommodityasuncertaintyoverdemand

growthislowfromshorttomidterm.

• Theimportanceofstocks.

• Conventionalvsunconventional:thenewnormal

• Riseofnonfossilenergy.Alongtermplay

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• Howtoassesstheweighofthe3sectors?

ü Byvalue?Byvolume?

ü Onelead:Weightintrade(RICI)


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• Metals25pct.

Gold,Copper,Aluminium andSilveraccountfor70pct.

• Agri35pct.

Wheat,Corn,CottonandSoybeanaccountfor50pct.

• Energy40pct.

Crudeoilaccountsfor72.5pct.ofEnergy20

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• Metals20pct

• Agri41pct.

• Energy39pct.

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• Metals15pct.

• Agri29pct.

• Energy56pct.

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Howcommoditypricesareformed?

1. TheFundamentals:Physicalsupplyanddemand

2. Therelationshipwiththedollar

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SourceCapitalEconomics

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3. Oilprice

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COEREXECODECOMMODITYINDICES

Global Oil

Source Cercle Cyclope

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Sourcesus.spindices.com

GSCIGlobalCommodityIndex GSCIEnergyCommodityIndex

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4. Financialmarkets:commoditiesasanassetclass

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2. KeyDriversin2017

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a. Thenewnormalforoil

b. China’sresilience

c. USD

d. Thewildcards

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a. Thenewnormalforoil

KeyDriversin2017

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Thelongtermview

SourceFinViz

OPECPricemanagement

Commoditysupercycle

FinancialcrisisRebound

OPECPricemanagement

TheNewNormal

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…Closer

SourceFinViz

June2014:OPECdecidestoletthemarketforcesprevail

IPWeekinLondon

OPEC/NOPECcuts

TheShaleBand

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Currentmarketdynamics:theoilband

• PriceshoveringbetweenacapandaflooronaverageüPetromatrix’s “Shaleband”from45to65$perbl.

üCurrentequilibriumbetween45to55$perbl.

• Therationale:üUShasbecomethenewswingproducer

üConventionalsupplyisstrongandgrowing

üDemandisgrowingbutnotexceedingsupplyanytimesoon

SourceFinViz

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TheUSShaleRevolution:OneToLast.• USbecamethesecondlargestoilproduceralmostatparwithSaudiArabiaandthefirstnaturalgasproduceraheadofRussia

• Withveryadifferentproductionpattern:largeopex andsmallercapexü“15daystodrillarig”.Lessrigsmorewellsandmoreproductivityperwells

üManyDrillingprofitablebelow60USDperbl.Largeproductivityimprovements.rigforthesameoutput

üCostssharplydownintheoilservicingindustry

üBreakevenat40USDperbl.

üWoodMackenziereportsa60pct Capexincreaseor15bn$amidtheUSfocussedproducers

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BreakevenpricesintheShaleoilproductionzones

SourceUSFederalReserveSystem

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Theoilbandmechanics(1)

• Ifsupplygrowsfasterthandemand:üpriceswilldrop

§ Conventionalproducerswillhavetocutproductionespeciallythemostexpensiveones

§ Demandinthecurrentcontextwilltaketimetorebound

üButifthislingers,peakoilconcernswillemergeandtherebalancingofdemandbysupplywilllookplausible

ü asaresultpricesbounceback

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Theoilbandmechanics(2)• Ifpricesreboundtoohigh:

üTheunconventionalproducerswillswiftlyreactivaterigsandaccelerate

production

üAsdemandislesselasticthansupply,therebalancingcanoccurratherfast

üPricesstabilize.Andfallagain

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ViableReservesvsOilPrice:

anillustration

OilPrice

PerCountryReserveBreakdownbtwviable&

unprofitableatthehighlightedoilprice

WorldReserves:1,739bn barrels

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Whatwouldderailtheshalebandtheory?

oBullish?§ Strongerdemand:1.6mbpd vs1.2oneyearago.Rebalancingisnear!§ 1trillion-dollarretrenchmentininvestmentsfortheglobaloilindustryasofjune 2016(WoodMackenzie).

§ Stocksaredecreasing

oBearish?§ PeakDemand:oilforgas§ ElectricVehicles§ OPEC/NOPECendofcuts

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Whatwouldderailtheshalebandtheory?

§ Stocksaredecreasing,butwithinreason

SourceEIA

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b. China’sresilienceKeyDriversin2017

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Chinain2015…

• Absorbed65pctoftotalseaborneironoretrade

• Imported45pctofrefinedcoppertrade

• represented51pctofworldwidenickelconsumption…

• and46pctofzincandtintotalconsumption,

• produces50pctoftheworldsteelproduction

• represented54pctofworldwidealuminiumconsumption source

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China’sweightoncommoditymarkets

SourcesFinancialTimes

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• Chinadelivereda6.7pct.GDPgrowthin2016.QEChineseway?

• Chinagrowthhasbeentargetedat6.5pctin2017.Itgrewby6.9pct

inQ2

• ThisismidtermforMrXi

• Debtisaconcern,butlikeJapanitismainlydenominatedinlocal

currencyandlocallyheld

• USDdenominateddebtrepresents5.9pct.ofGDP(Capital

Economics)

• Yetwhetherthe“realeconomy”isstillgrowingstronglyremains

debated

Chinaisdoingwelldespitepotentialworries

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c. USD’sstrengthKeyDriversin2017

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CommoditypricesandUSD:Acloserelationship

• Traditionally,USDandcommoditieshaveaninvertedcorrelation

• NolongerinthewakeofTrump’selectionbutcorrelationisnowback

• Thelackofspecificfuel

o TheUSD.Shouldbestronger.Yet…

o TheCommodities.NoSupercyclelooming

• Sofornow themechanics areback:

o Dollarup- Commodity down

o Dollardown- Commodity up55

LambertCommodities SourceFinViz &TradingEconomics.com

FedEffectTrumpEffect

ShaleBandEffect

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SourcesCapitalEconomics

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d. Geopoliticsandclimate

KeyDriversin2017

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Thewildcard:Geopolitics

• Neversincethecoldwarhaveweseensomuchthreats/dislocations• Tonamebutafew:

§ ThreatsofdislocationinEuropeo Brexito Catalunya

§ AstrongerRussiao Ukrainao Balticrepublics

§ Kurdistanindependence§ NorthKoreaballisticcapabilities§ SouthChinaSeatobecometheSeaofChina

• Yetmarketsareintotaldenial.Forhowlong?

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Thewildcard:Climate• Climaticdisruptionsareafactortocountwithforprobablymanyyears• Tonamebutafew:

§ ElNiñoandLaNiña:Drywherewet.Wetwheredry§ Typhoons,CyclonesandStorms

• Oddsofoccurrencearerising• Potentialdisruptionofcommoditysupplychains

Australia

Peru

Texas

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MyLong– Shortgame:

• Bandtradingforcrude-USShaleisresilientandnimble

• BullishonCopper– ChinaandEvs,plusdisruptionsinsupply

• Speculativebuyplay:lithium,Platinum,Palladium,Cobalt

• Shortonotherbasemetals– Pricesgotaheadofrealdemandon1st half17

• LongGold- Geopoliticalriskisatitshighestsincedecade.Quitecheapnow.

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MyLong– Shortgame:

• Nosupercycleasnonewjuggernautemerging– ExceptIndia,buttoosmallan

economytomakeadifferencefornow…

• Goodnews:nodisruptioninfoodsupply.SomuchforAgCommods.

• Commodityasanassetclass?Lookelsewherefornow.

Andwhataboutyour game?62

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