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 prices for future delivery. It creates a "positive roll yield" for long positions.
• Contango: A market condition where future prices are higher than the spot price, often resulting in negative roll yields for long-term investors.
• Just-in-Time vs. Just-in-Case: A shift in global supply chain philosophy from lean, efficient inventory management to holding larger buffers to prevent shortages.
• Refined Product Tightness: The scarcity of diesel, jet fuel, and petrochemicals, which are as critical as crude oil.
• Structural Floor: The theory that the baseline price for commodities has permanently shifted higher due to geopolitical instability and supply constraints.
• Asymmetric Risk/Reward: A trading strategy (like a bull call spread) designed to limit downside loss while maintaining exposure to potential upside.

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1. The Iran Conflict and Energy Markets

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

• Logistical Nightmare: Even if a peace deal were reached, normalization would take 2–3 months due to damaged refineries, the need to clear inventory, and the logistical displacement of tankers.
• Supply Constraints: US shale production has shown zero growth in the last six weeks, suggesting a potential saturation point or a lack of incentive due to the backwardated curve.
• Refined Products: The crisis extends beyond crude to diesel, jet fuel, and petrochemicals. Furthermore, the Middle East is a major supplier of sulfuric acid (essential for copper mining) and fertilizer feedstocks, creating a ripple effect across metals and agriculture.

2. The Importance of Term Structure

Hansen emphasizes that professional investors must understand the "forward curve."

• Roll Yield: In a backwardated market, investors profit by selling expiring contracts at higher prices and buying the next month at lower prices.
• Performance Gap: Hansen highlights that between 2021 and 2026, the Bloomberg Commodity Total Return Index outperformed the Spot Index by 26% (83% vs 57%) specifically because of the tailwinds provided by backwardation.
• Natural Gas Exception: Natural gas often trades in steep contango, making it a difficult long-term hold for passive investors.

3. Agriculture and Fertilizer Shortages

The conflict has created a "fertilizer crisis" that threatens global crop yields.

• Mechanism: Farmers are planting under-fertilized crops due to supply shortages and high costs. This is expected to lead to lower yields in the coming harvest.
• Trading Strategy: Hansen suggests that while agriculture is typically in contango, the tightening supply/demand balance could shift these markets. A potential "pair trade" involves going long on nitrogen-intensive crops (wheat/corn) while shorting less-intensive crops (soybeans).

4. Metals and Gold

• Copper: Copper is viewed as a more stable, fundamental trade than gold. It is currently supported by supply-side struggles (lack of sulfuric acid) and recovering demand in China.
• Gold: Gold has experienced a "liquidity shock" where it initially sold off during geopolitical events. Hansen views the current price action as a consolidation phase. He warns that if gold breaks below the $4,600–$4,685 area, it could signal further downside.

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

Patrick Ceresna outlines a strategy to capture the "structural floor" in oil without chasing front-month volatility:

• Structure: A bull call spread on the December 2026 WTI contract.
• Execution: Buy the $70 call and sell the $90 call.
• Rationale: The trade is financed by the sale of the $90 call, and the premium paid is largely intrinsic value. This reduces "Vega" (volatility) exposure and time decay, creating a defined-risk, high-delta position.

6. Macro Outlook and Synthesis

• Secular Inflation: Both Townsend and Hansen agree that the world is moving toward a "just-in-case" inventory model, which is inherently inflationary.
• Equities: While the S&P 500 has rallied to new highs, Townsend remains skeptical, holding bear put spreads (6800–6000) as insurance. He believes the market is ignoring the exponential risk of a prolonged energy blockade.
• Conclusion: The "old world" (fossil fuels/traditional commodities) is striking back against the "new world" (energy transition). Investors should focus on hard assets, as the supply side is struggling to keep pace with global power demands, likely keeping commodity prices elevated for the foreseeable future.

"The old world is striking back against the new world because the new world wants to accelerate at 100 miles an hour... but the old world is bumping along at a much lower speed because they can't keep up with the demand." — Ole Hansen