Analys

A moment in markets – Commodity returns can be enhanced

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4 år sedan

den

27 april, 2021

Redaktionen

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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Analys

Oil prices climb, but fundamentals will keep rallies in check

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11 timmar sedan

den

18 mars, 2025

Redaktionen

Brent crude prices have risen for three consecutive days, gaining USD 1.7 per barrel since last Thursday’s close. On Friday afternoon, prices briefly dipped to USD 69.9 per barrel before rebounding to a high of USD 71.8 per barrel yesterday morning. As of this morning, Brent crude is trading at USD 71.67 per barrel, up USD 0.77 per barrel since midnight.

Ole R. Hvalbye, Analyst Commodities, SEB

Why?

1. Chinese economic data
Two days ago, China released better-than-expected consumption, investment, and industrial production data for the start of the year, signaling economic resilience despite the need for further stimulus. With Donald Trump’s tariffs posing a risk to growth, China has responded by committing to policies aimed at boosting incomes, stabilizing equity and real estate markets, and reviving economic consumption – all of which naturally support crude and refined product demand.

2. U.S. strikes on Yemen’s Houthis
The U.S. airstrikes on Yemen’s Houthis on Sunday, March 16 served as a stark reminder of geopolitical risk, a factor that has not been fully priced into the market recently.

3. Rising tensions in the ME
Escalating tensions in the Middle East are currently (short-term) overshadowing concerns about a potential global oversupply. Overnight, Israel launched a series of military strikes on Gaza, breaking a nearly two-month ceasefire.

4. U.S. sanctions on Iran
Iran’s Oil Minister stated over the weekend (March 15) that Iranian oil exports are “unstoppable” and that Iran will not relinquish its share in the global oil market. The new U.S. administration has already imposed sanctions on Iranian crude, but these have yet to impact production levels significantly.

As of February 2025, Iran’s crude production stood at 3.23 million barrels per day (bpd), remaining above 3 million bpd since September 2023 (Platts data). Of this, Iran exports approximately 1.7 million bpd. For comparison, under Trump’s previous presidency, the U.S. withdrew from the Iran nuclear deal, and Iranian crude production fell to 1.95 million bpd by August 2020, significantly reducing its export capacity.

If the Trump administration reintroduces maximum pressure sanctions on Iran, the market impact could be substantial. In a worst-case scenario, where Iran loses its entire 1.7 million bpd of exports, and if Saudi Arabia or other major producers do not immediately compensate for the loss, global oil prices could theroretically see an upside of as much as USD 10 per barrel (Platts).

Bearish fundamentals still loom:
Despite these bullish factors, crude remains on track for a quarterly loss due to fundamental market weaknesses. Escalating global trade tensions threaten oil demand. OPEC+ is set to increase production from April, adding additional supply to a market already at risk of oversupply.

As a result, while geopolitical risks and bullish headlines provide short-term support to prices, SEB: forecasts that fundamental market conditions limit the potential for sustained price rallies.

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Analys

Chinese stimulus measures drive Brent up and out of the USD 69-71/b trading range

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1 dag sedan

den

17 mars, 2025

Redaktionen

A tight sideways range last week. Bearish equities on tariff fears. Brent crude rose 0.3% last week with a close of USD 70.58/b. It traded in a range of USD 68.63 – 71.25/b. Closing wise it held well within the USD 69 – 71/b band, held down by S&P 500 moving into correction mode and the Russel 2000 index moving into bear territory. Brent is up 0.6% this morning at USD 71/b with a high so far today of USD 71.8/b. That is the highest intraday price point since 3 March. Brent crude is thus pushing towards the upper boundary of the trading range over the past 8-9 days.

Bjarne Schieldrop, Chief analyst commodities, SEB

Chinese stimulus measures feed some optimism back in crude. The upwards move this morning is driven by news that politicians will boost people’s income, revive consumption and stabilize the stock and real estate market. The Chinese economy has been struggling for a while following Covid-lockdowns and a tanking real estate market. The tariffs from Donald Trump are now an additional challenge making it even more imperative to support the Chinese economy. While the signaled measures are supportive and positive, words like ”reasonable” growth in wages are used. There isn’t any sense of ”bazooka” stimulus measures as of yet.

Moving up with the negative fallout from the Trump tariffs is left for another day to worry about. The oil market is thus in a balance between the negative effects of Trump’s tariffs versus the positive effects of Chinese stimulative measures. The global oil market isn’t in surplus yet if we look at the 1-3mth time-spreads as a measure. The bearish downwards pressure on oil has come from the forceful selloff in US equities with natural fears that the tariffs from Trump will give both the US and the global economy a hard, negative kick. But today it seems that the positive political signals from China on stimulus there is set to lift Brent crude up and out of the depressed range it has traded in over the past 8-9 trading days. The negative fallout from the Trump tariffs is left for another day to worry about it seems.

Brent crude 1mth has traded in a tight range over the past 8-9 trading days when it has closed between USD 69-71/b. Today it looks set to move up and out of that range.

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Analys

Large drop in total commercial petroleum inventories

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5 dagar sedan

den

13 mars, 2025

Redaktionen

Brent crude prices have risen by USD 0.8 per barrel so far this week since Monday’s opening. However, prices touched a weekly low of USD 68.6 per barrel on Tuesday before reaching a weekly high of USD 71.20 per barrel this morning.

Last week, U.S. crude oil refinery inputs averaged 15.7 million barrels per day, up by 321 thousand barrels per day compared to the previous week. Refineries operated at 86.5% of their total operable capacity during this period. Gasoline production declined to an average of 9.6 million barrels per day, while distillate fuel production also fell, averaging 4.5 million barrels per day.

U.S. crude oil imports averaged 5.5 million barrels per day, a decrease of 343 thousand barrels from the prior week. Over the past four weeks, imports have averaged 5.8 million barrels per day, reflecting a 10.6% year-on-year decline compared to the same period last year.

Total commercial petroleum inventories fell by a large 6.0 million barrels, contributing to some positive price movements observed yesterday evening and this morning. Although commercial crude oil inventories (excluding the SPR) increased by 1.4 million barrels, this was notably lower than the 4.3-million-barrel build forecasted by the API on Tuesday. With the most recent build included, U.S. crude oil inventories now stand at 435.2 million barrels, down by 12 million barrels compared to the same week last year.

Gasoline inventories decreased by 5.7 million barrels, exceeding the API’s reported decline of 4.6 million barrels. Despite this, gasoline stocks remain 1% above the five-year average. Distillate (diesel) inventories dropped by 1.6 million barrels, compared to the API’s forecast of a 0.4-million-barrel increase, and are currently about 5% below the five-year average.

Over the past four weeks, total products supplied, a proxy for U.S. demand, averaged 20.7 million barrels per day, a 3.9% increase compared to the same period last year. Gasoline supplied averaged 8.7 million barrels per day, showing a modest increase of 0.1% year-on-year. Diesel supplied averaged 4.1 million barrels per day, up by 9.5% from the same period last year. Additionally, jet fuel supplied saw a 1.5% year-on-year increase.

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