Analys

A moment in markets – Commodity returns can be enhanced

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4 år sedan

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27 april, 2021

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In ‘A moment in markets – Are we in a commodity supercycle?’ the promising environment for commodities, especially sectors like industrial metals, was outlined. But for investors who endorse the case for commodities, portfolio implementation is the natural next step to ponder over. In many cases, having a pure beta exposure to commodities makes perfect sense. In some instances, however, smarter approaches present viable alternatives.

The return breakdown

Investors who are not interested in storing physical commodities are likely to seek synthetic exposures to the asset class. Exchange-traded commodity products are either physically-backed or synthetic, i.e., exposed to futures. When it comes to commodity futures exposure, the total return to investors is as follows:

Total return of commodity futures exposure

To avoid getting physical delivery of commodities upon expiry of the futures contract, investors maintain their exposure by rolling their futures position to a contract with later maturity. This process can incur a carry return because futures prices may converge to spot prices over time, i.e., there is a gain or loss in carrying the futures contract up or down the curve. When futures curves are in contango, i.e., prices are upward sloping, roll yield is typically negative and when curves are in backwardation, i.e., prices are downwards sloping, roll yield is typically positive.

A pure beta approach would normally provide exposure to contracts towards the front end of the futures curve. Such strategies tend to do well relative to those that are exposed to contracts further out along the futures curve when commodity prices are in a bull run and the spot return component is dominating total returns. This is because contracts at the front end are closer to the spot price and normally experience higher price fluctuation than those further along the curve. The roll return will, however, depend on the shape of the futures curve.

Optimizing the roll return

In contrast to the front-month approach, a dynamic approach to selecting futures contracts that promises a potentially better roll yield can add incremental value to total returns over a longer period. For example, the Bloomberg Commodity Index (BCOM) approach invests in contracts towards the front end of the futures contract.

In figure 1 the case of aluminium is currently the July 2021 contract. In contrast, the S&P GSCI Aluminium Dynamic Roll Index, which reassesses its exposure monthly and can go further out on the curve, is currently in the December 2022 contract.

Looking at the shape of aluminium’s futures curve, we can observe that while July 2021 faces contango, the curve is in slight backwardation around the December 2022 contract (see figure 1 below).

Certain approaches give exposure to specific points along the futures curve, e.g., the UBS Bloomberg Constant Maturity Commodity Index (CMCI). Each approach has its own merits and investors should take the time to familiarise themselves with the methodology.

The key distinction for a dynamic approach in the current macro environment is that sharp fluctuations in demand and supply conditions in recent months have caused futures curves to frequently change shape. Aluminium’s entire curve at the end of January was in steep contango before becoming much flatter when supply curtailment from Inner Mongolia in March tightened the market. While there is no single formula to predict which approach will outperform when, it is useful to recognise that curves can change shape, and this can have an impact on roll returns.

Sources: WisdomTree, Bloomberg. Data from 31/05/01 to 31/03/21 and based on monthly returns. The Optimised Roll Commodity Total Return Index started its live calculation on 30/07/13. Calculations are based on total return indices and include backtested data. Historical performance is not an indication of future performance and any investments may go down in value.

The deciding factor

With all the options available to investors, the decision comes down to whether the commodity exposure is a strategic or tactical decision. Enhanced approaches aim to add value by improving the carry return and reducing volatility – as longer tenor contracts tend to exhibit less price fluctuation compared to front-month contracts.

The true benefit of smarter approaches that seek to enhance the risk-return profile of commodities becomes apparent over longer periods (see figure 2). Enhanced approaches are, therefore, better suited to strategic investors looking for broad commodities exposure.

/Mobeen Tahir, Associate Director, Research, WisdomTree

Relaterade ämnen:commodities wisdomtree

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Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

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Analys

Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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4 dagar sedan

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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Analys

Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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6 dagar sedan

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.