by Barani Krishnan
Oil will likely remain the only commodity that “truly matters” to investors and traders in coming months as the Iranian sanctions crisis keeps crude prices on the boil, while metals and agricultural futures get hemmed in by tariff-sparked trade wars, fund managers and investment bank analysts say. Oil prices have jumped around 50% over the past year, trading at their highest since November 2014, largely due to carefully coordinated production cuts by the Organization of the Petroleum Exporting Countries (OPEC), the world’s most powerful commodities cartel.
A rebounding American economy, sharper-than-expected drawdown in US crude inventories, weakening shale oil output in the United States and other global supply disruptions have added to the run-up. While occasional selloffs have made the rally a little uneven, oil’s general upward trend and bullish price forecasts remain solid.
The outlook for most other commodities is cloudy at best. Copper futures are down more than 10% on the year on weakening global demand, aggravated by worries about retaliatory trade tariffs from China, the EU and other nations to US measures. Even gold, an inflation hedge which typically rallies with oil, has suffered as result of a strong dollar.
On the agricultural front, soybean futures have plumbed 2008 lows. While sugar appears to be one of the few crops that have bucked the trend by outperforming, analysts have also fingered oil in that rally, citing the sugar-derived biofuel ethanol for keeping pace with soaring gasoline prices.
“There’s no question about it. Oil was the first in the present commodities cycle to enter a bull market, and that explains the phenomenon around it,” said Adam Sarhan, founder and CEO of New York-based global capital markets fund 50 Park Investments. “The fact that oil is leading the other commodities is a reflection of the inherent weaknesses in the other markets. Big institutional money is buying oil. The US economy is growing. Demand for oil is growing,” Sarhan added, saying he has increased his focus on oil over other commodities for his clients.
A barrel of US crude, pegged to the West Texas Intermediate (WTI) contract on the New York Mercantile Exchange, trades above $74 a barrel. Brent, the North Sea, UK-based global oil benchmark that trades on the Intercontinental Exchange, is hovering above $78 a barrel. Just a year ago, both were at around $50 a barrel.
Many analysts see WTI pushing past $80 a barrel, and Brent heading toward $90 and beyond, if the United States successfully chokes off oil supplies from Iran, the world’s fourth largest crude exporter. The Iranian supply crisis erupted in May after President Donald Trump rescinded an international agreement by the Obama Administration to lift sanctions on Iran in exchange for curbs that Tehran willed on its nuclear program. Since walking off that deal, the White House has been pressuring US allies and other foreign powers not to take Iranian oil.
Iran, in retaliation, has threatened to block the Strait of Hormuz, a narrow passageway within its jurisdiction that lets through one-third of the world’s seaborne oil from other Gulf countries to key markets in Asia Pacific, Europe, North America and beyond. Analysts said price ramifications for crude cannot be understated if both these events materialized.
Just last week, analysts at investment bank Morgan Stanley raised their forecast for Brent by $7.50 a barrel to $85 over the next six months, pinning the revision on Trump's tougher-than-anticipated Iran policy. “We think the risk-reward is much higher in the near term” for oil compared with other commodities, said Jonathan Goldberg, founder of the $600 million New York energy hedge fund, BBL Commodities. A former Goldman Sachs and Glencore energy trader, Goldberg has also launched a macro fund where he aims to raise $1 billion to trade currencies and equity indices based on broad commodity trends.
Goldberg said he was particularly drawn to the spreads play between the front month and forward contracts in crude now, due to the premium fetched by oil for spot delivery. The rush of short covering and the creation of fresh long positions pushed the six-month WTI calendar spread to a backwardation, or premium, of more than $6 per barrel last week.
“We think spreads at the front end of the curve will continue to perform because of rolling interests,” Goldberg said, referring to the switching investors do to maintain their front-month position in oil as contracts expire. “Supply disruptions out of Iran, Canada, Libya and Venezuela, along with relatively strong demand, have come together to make the near-term outlook for oil very positive,” Goldberg added. “While each commodity trades on its own fundamentals, right now, oil provides the best outlet for investors because of its unique supply features.”