Commodities August 2018

Recovery signals for the oil market?

Saudi Arabia has started to increase inventories again, for instance here in the Ras Tanura oil refinery of Aramco on the east coast near Dhahran on the Persian Gulf.

Growing unrest caused downward pressure on energy markets while agricultural commodities developed well. Ali Beydoun, Portfolio Manager, analyzes the recent developments in commodity markets and highlights the impact on Picard Angst commodity strategies.

Despite compelling fundamentals across commodity sectors, future markets suffered a bout of jitters and ended the month in the red amid the trade-related upheaval. The rising tide didn’t spare energy markets which had to give back some of the gains recorded throughout the year after a litany of game-theoretic moves marked on multiple fronts against China, Iran, Venezuela and Russia. The US policy risk have sown panic among investors as it conveyed mixed messages flagged by the US-EU symbolic trade war truce which have failed to quell the skeptics, followed by an agitation on the Chinese front where additional tariffs are being planned and concluding by a possible oil supply disruption in the wake of recent confrontation at the gates of Bab el-Mandeb. Amidst the policy noise, the agricultural space managed to end up the month on a positive note where an extended dry period in the Black Sea wheat crop and an EU coy promise to increase US soybeans purchases have served as notable catalysts.

Agricultural commodities play catch up

At the sector level, only agricultural commodities recorded price increases for the month. With notable moves across the grains where wheat, corn and soybeans ended up paring some of losses seen over the last quarter. This move was boosted by adverse weather conditions affecting the Black Sea crops, tightening supply among individual agricultural products as reported by WASDE showing unforeseen stock contractions; with the exception of sugar which suffered large losses due to weak BRL and strong crops. On the other hand, the oil complex was dented by the rising tide of supply where the prices have taken a leg lower despite the recent Middle Eastern tensions which could thwart a significant part of the global oil supply chain. Moreover, the ambiguous tone used by the U.S. administration to address the Iranian government has also failed to soothe oil prices where the market belies the impending supply squeeze. Meanwhile, the deleveraging campaign seen in China earlier this year has impacted infrastructure spending which in turn weighed on industrial metals. Nonetheless, base metals inventory levels signal auspicious conditions given a reversal in spending policy, additional cash injections into the market and further relaxation of constraints on banks to expand lending. By the same token, precious metals also came under pressure where remarkably gold have failed to surge amid the political turmoil and have seen a potent correlation to the Chinese yuan and ironically reflected Chinese economic risk and not American policy risks.

Picard Angst strategies continue to beat the benchmarks. Picard Angst indexes declined slightly.

As a consequence, agricultural commodities have recorded significant gains. Market benchmarks such as the Bloomberg Commodity TR index and S&P GSCI Commodity TR index registered losses of 2.13% and 3.53%, respectively. Given its more balanced exposure to agricultural commodities and a strategic exclusion of livestock, our own PACI strategy outpaced both indices while recording a loss of 1.38% in July. In a similar vein, ex-agriculture strategies exhibited particular weakness over the month with our PA Energy & Metals strategy posting a loss of 3.70% but pulling ahead of the Benchmark Bloomberg Commodity ex-Ag ex-LS TR (-4.08%).