MacroVoices #529 Ole S Hansen: Commodities in The Wake of The Iran Crisis

“I think there's an argument that once the dust settles and we're on the other side of this, we should expect prices to settle in at least $10 higher level, maybe even $15 higher. The floor has moved higher for this. That basically means if you're looking at Brent Crude for December at $80, that's potentially where the new floor should be. So I'm struggling to see any forward prices really reflect what potential will unfold in the coming months because it will take time.”

“Middle East has obviously expanded its production base. Why just sell oil out of the ground and send it on the ship when you can actually make some money on the process of refining these into other areas. That's why we suddenly left with a market where besides gas, we have all the associated productions of commodities... the energy intensive commodities, that's anything from aluminium to especially fertilize which requires a lot of gas with the main feed stock.”

“If you have a market which is backwardation, i.e. it's a signal of a relatively tight supply, and you're holding a futures position to hedge your exposure... every time you roll that position, if we are in backwardation, you'll be selling an expiring contract at a higher price where you buy the next. That is giving you a positive roll yield over time. And obviously, the opposite occurs if you have a period with ample supply.”

“Reason we just come to know as well that miners in South America then need sulfuric acids in order to break down the copper from their mines and that basically means with 50 percent of that coming out of the Middle East, then we also suddenly face a potential shortage in that area. We talked about helium has been mentioned prior to the chips industry. So it's just the whole, how the breadth of this crisis and how it impacts not only energy, but anything through to metals.”

“It really only takes one bad season for that whole equation to change around. And that's really the worry in the coming months, that if we see some troubled weather potential as well... we will see downgrades to crop production targets for this year. And that will start to eat into an overhanger supply because we are coming into this, just like the oil market, we're coming into this fertilizer crisis with ample supplies of some of the key crops.”

“In the last six weeks, how much has the US crude oil production risen by zero barrels? How many additional rigs has been employed in the US shale area? Zero rigs. Basically, where are the US producers? Why are we not seeing any response? And I think part of that is clearly the fact that the curve is very backwardated. So if you as an oil producer needs to hedge your production three to six months out, the prices are still not that great.”

“We've gone from a bit of a liquidity and inflation shock, perhaps now more towards a growth shock, where the implications of this crisis will start to play out in the coming months in terms of soft economic growth. And with that also, the central bank struggle business between focusing on inflation on one hand, and perhaps focusing on economic stimulus on the other side. And I think that that will eventually send the gold prices higher again.”

“The old world is striking back against the new world because the new world wants to accelerate at 100 miles an hour towards progress, but the old world is bumping along at a much lower speed because they can't keep up with the demand that is coming from all the different, all the new technologies and all the direction that we want to go. I think that basically leaves us in a situation where the old saying that the best cure for high price is a high price because it incentivizes supply.”