By Jeremy Schwartz, CFA, Executive Vice President, Global Head of Research, WisdomTree
Last week, we had the pleasure of hosting Ed Morse, head of commodities research at Citi, on our Behind the Markets podcast to discuss his outlook for commodities.
Most commodities today have seen a lack of investment in new exploration, particularly across metals. The incremental demand, with supply constrained, pressures prices higher.
Commodities today are generally in contango, where the futures price is higher than the spot price, but Morse sees this changing to a case of backwardation, where the futures price becomes lower than the current price. This will change the environment for the monthly rolling of futures contracts, going from a cost to a net positive for investors in futures.
This was also the case for the last super cycle for commodities. We had a strong market that was in backwardation, so investors were paid to roll their contract positions forward each month, and commodities prices were going up.
The COVID-19 pandemic delayed this inflection point for roll yields from happening sooner, as it caused less demand for commodities, and transportation fuels in particular. Inventories built up significantly but are now drawing down. In Q4, the supply of oil is down 9%–10% from last year. Some of this production decline is the lack of investment and capital expenditures, particularly in the U.S.
In Q4, Morse sees demand for oil down 4%–5% year-over-year. With supply down 9%–10%, inventories will continue to draw down around five million barrels a day. This is particularly rare in September, when inventories are usually building following the driving season.
Gold’s Rise Is Not Ephemeral: Bullish moves in gold and silver tend to be longer-lasting. Morse sees gold as an inevitable and attractive macro investment in a world of low interest rates,