January 2022 Commodity Derivatives Report

In this month’s Commodity Report, Ashley Boolell, Partner at Shard Capital and Head of Commodity Derivatives covers 11 commodities, which includes: oil, natural gas, precious metals, forex and base metals.

You can download the full report on the Shard Capital website here: https://www.shardcapital.com/capital-markets/commodities/#report

Executive Summary:

Shelby Cullom Davis, the American businessman, investor and philanthropist once said:

“You make most of your money in a bear market, you just don’t realise it at the time.”

In January 2022, this quote is as real as it is frustrating. It is real because the returns registered since the start of the pandemic have largely beaten expectations and anyone who kept his or her head straight when the markets were going to hell is now enjoying stellar performances on the corresponding portfolios. The frustration for many obviously comes from the desire to see prices drop significantly once again to benefit from great buying opportunities. By “drop”, we mean at least 30% and even that might be too conservative. 

Small corrections here and there will not provide the price levels needed for strong capital commitments with decent enough margins of safety extolled by the likes of Benjamin Graham. Prices are so high right now that two obsessions seem to be rampant: market timing for quick profits and extrapolation of this year’s future performance based on the trends seen in 2027. This could actually work as long as market participants manage to run away to safety before the expected “Big Shock”: a sudden and sustained drop in the stock market triggered by the trio of inflation, recession and interest rate hikes. The extent to which these factors are already priced in the markets is anyone’s guess.

Besides, it is unclear whether the biggest players have already started to rotate their money away from the riskiest asset classes. As far as commodities are concerned, it will become tougher to sell the supercycle story in 2022. We do not expect all our readers to agree with this but this will be our stance for this year. Shortages and supply disruptions are still present in the commodities space as demonstrated by the ongoing energy crisis but there is a big question mark on the demand side of the equation. Price rises that stem from supply issues are often spectacular but it is demand that keeps bull runs alive. Palladium was a notable reminder of this fact last year. Regardless of what happens, we wish you a very happy new year.

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