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

Key Concepts

• Backwardation: A market condition where the spot price of a commodity is higher than the forward price, often signaling tight current supply.
• Contango: A market condition where the forward price of a commodity is higher than the spot price, typically occurring when there is ample supply.
• Roll Yield: The profit or loss generated by rolling a futures position from an expiring contract to a longer-dated one; positive in backwardation, negative in contango.
• Just-in-Time vs. Just-in-Case: A shift in global supply chain philosophy from minimizing inventory to maintaining higher buffer stocks due to geopolitical instability.
• Secular Inflation: A long-term, persistent increase in price levels driven by structural changes (e.g., energy transition, supply chain fragmentation).
• Refined Products: Commodities like diesel, jet fuel, and petrochemicals that are processed from crude oil.

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1. The Energy Crisis and Iran Conflict

Ole Hansen (Saxo Bank) argues that the market is underestimating the duration and severity of the energy disruption caused by the Iran conflict.

• Supply Chain Lag: Tankers leaving the Persian Gulf take weeks to reach destinations; the full impact of the supply disruption is only beginning to manifest.
• Structural Floor: Hansen suggests that once the conflict settles, the "floor" for Brent crude will likely be $10–$15 higher than pre-conflict levels (moving from $60–$75 to a new $80+ floor).
• Production Stagnation: US shale production has seen zero growth in rig deployment or output over the last six weeks, suggesting a potential saturation point or lack of incentive due to the backwardated curve.

2. Commodity Trading and Term Structure

Hansen emphasizes that passive long investors often lose money in commodity markets due to contango, where the cost of rolling futures contracts erodes returns.

• Performance Gap: Over a five-year period (2016–2021), the Bloomberg Commodity Spot Index rose 52%, but the Total Return Index (accounting for roll yield) only rose 14% due to persistent contango.
• Backwardation Advantage: In the current environment, extreme backwardation provides a "tailwind" for investors, as they sell expiring contracts at a premium and buy the next month at a discount.

3. Agriculture and Fertilizer Shortages

A critical, under-priced risk is the global fertilizer deficit, which threatens crop yields in the upcoming season.

• Mechanism: Fertilizer production is highly dependent on natural gas. Shortages in the Middle East (a major exporter) mean farmers are planting under-fertilized crops.
• Trade Strategy: Hansen suggests that while agricultural markets are typically in contango, the tightening supply could shift them toward backwardation. A potential "Paris trade" (long wheat, short soybeans) is proposed to capitalize on the nitrogen-intensity of wheat versus the lower fertilizer requirements of soybeans.

4. Metals and Industrial Demand

• Copper: Copper is viewed as a more stable, fundamental trade than gold. Its price is supported by both supply constraints (miners need sulfuric acid, 50% of which comes from the Middle East) and recovering demand in China.
• Gold: Gold is currently consolidating after a sharp correction. While it remains a long-term geopolitical hedge, it is currently sensitive to "oil-driven inflation" signals, which can trigger liquidation by hedge funds.

5. Trade of the Week: Crude Oil Bull Call Spread

Patrick Ceresna outlines a strategy to capture the structural repricing of oil without chasing front-month volatility:

• Methodology: A bull call spread on the December 2026 WTI contract.
• Structure: Buy the $70 call and sell the $90 call.
• Rationale: By focusing on the deferred part of the curve, the trade minimizes Vega (volatility) exposure and time decay. The premium paid is primarily intrinsic value, creating a defined-risk, high-delta position that benefits from a higher structural floor in energy prices.

6. Market Outlook and Synthesis

• Equities: Despite the geopolitical risk, equity markets have rallied, driven by systematic buying (CTAs, gamma effects). However, the hosts warn that if the Iran conflict forces a long-term shut-in of oil wells, the resulting global economic stagnation will eventually overwhelm current equity momentum.
• Inflation: Both hosts agree that the current energy shock is likely to act as a self-reinforcing inflation signal, strengthening the case for long-term exposure to hard assets.

Conclusion: The primary takeaway is that the global economy is transitioning from a "just-in-time" to a "just-in-case" model. Investors should look past the front-month volatility in energy and focus on the structural shifts in supply chains and commodity inputs (fertilizer, metals) that will likely sustain higher price floors for the foreseeable future.