Over the past month, there has been a lot of drama in the commodity market, since the early content "Goldman Sachs Group: is there still room for commodities to rise?" "after prompting the risk of a pullback, the black department experienced a roller coaster market, with varying degrees of pullback in copper and aluminum, which are the most popular among foreign banks.

But what is interesting is that in the face of frequent domestic high-level shouting and sharp pullback of commodities, overseas institutions have not diminished their enthusiasm for singing more commodities. Goldman Sachs Group hit the wind again on May 27th, saying that commodities were decoupling from China and calling on investors to pick up bargains.

Despite Goldman Sachs Group's boast that "commodities are no longer China-centric", it is too early to judge that future commodity markets will be decoupled from China, given the uncertain political prospects of the US.

It is worth noting that in this pullback, chemicals led by crude oil have been least affected, while WTI oil prices have hit a new high in recent days in shock.

Why is crude oil so strong? In our article "risk is also an opportunity and concussion is also an opportunity" in early March, we put forward the logic of being optimistic about oil prices. Financial markets have always been forward-looking, and investment logic and views should constantly keep pace with the times.

Today, Sanshi shares with you the new view of an overseas macro tycoon who saw oil prices of $100 (more aggressive than Goldman Sachs Group sang to $80) and made more crude oil forward futures, forward options and energy stocks.

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First of all, let's review my view on the macro.

I am optimistic about economic growth, and macro policy has shifted from monetary dominance to fiscal policy, which should lead to higher economic growth and higher inflation, both of which are good for crude oil.

The Fed has changed its position, and economic growth or low unemployment will no longer cause the Fed to subconsciously tighten policy. In fact, under average inflation targeting, the Fed has warned of psychological expectations of high inflation. In essence, the Fed will allow the economy to run hotter than ever before.

Wall Street doesn't like the Fed's willingness to accept higher inflation. I wrote an article about how the market will eventually debunk the Fed's bravado and raise the break-even inflation rate (inflation breakevens) to a level that forces the Fed to act.

After writing that article, I received an email from a strategist who was much smarter than me. He put it very simply (I repeat): "you complicate things, oil, and they will raise the price to more than $100." "

I immediately realized that he was right that long break-even inflation was still an attractive deal, but oil was more like a litmus test of the Fed's resolve. Energy affects the price of everything, and of course you can inflate without raising energy prices, but it's hard. Wall Street will use oil prices to express the view that the Fed lags behind the inflation curve, which is the new logic of being long oil.

So far, most of us know the story of energy: the moribund industry is facing a capital withdrawal, but demand for energy products is still rising, leading to higher oil prices. However, the oil market seems to believe Powell's claim that the surge in oil prices will prove temporary.

To understand the changes in market expectations for oil prices, let's take a look at the changes in the WTI crude oil futures price curve over the past eight months:

At the end of the third quarter of last year, the price curve of WTI futures showed an upward trend, with forward contracts trading above $50 in December and less than $40 in recent months. At the end of the fourth quarter, it changed, with recent contracts rising from a low of $40 to $50, while far-month contracts fell back to $45.

This trend has continued since the beginning of the year, with contract prices soaring to $65 in recent months, and although far-month contract prices have also risen, they are at a deep discount to recent months.

This suggests that the market is more worried about short-term supply than the long-term outlook for the crude oil industry. Although I have seen concerns about a surge in demand in the post-epidemic period, the market has almost completely ignored the longer-term situation.

Not only are investment managers no longer investing in new oil exploration projects, the International Energy Agency (IEA) has just released their 2050 carbon Neutralization report:

Shockingly, one of the report's recommendations is that "no new oil and gas fields will be approved after 2021".

Think about it. What does it mean that there will be no new oil and gas projects after 2021? This signal is important because the IEA's proposal is not to try to reduce demand (for example, by imposing a petrol tax), but to choose to curb supply.

Policy makers choose the best way to deal with climate change is to significantly reduce supply, as investors, do not care whether the policy is right or wrong, but what the policy outcome will be.

Do you think the social demand for energy will suddenly decrease? I don't think so at all.

Although many people say they support reducing the use of fossil fuels, their actions are often inconsistent with ideas. I'm not here to criticize them, I'm just making a simple prediction: demand will not fall unless energy prices rise and rise a lot.

In fact, I believe that this is the intention of policy makers, and that only a significant increase in fossil fuel prices can encourage consumers to switch to other forms of energy, which is the real ultimate goal.

If anyone has doubts about long energy, you can almost argue that long crude oil is a good thing for society. If policy makers want higher energy prices, why don't we help them?

While the IEA report has implications for future policy, it is not the only bullish news recently released. Take a look at this tweet from Javier Blas, chief energy analyst at Bloomberg, especially the fourth point:

Javier is talking about two recent Waterloo incidents involving the oil majors: 1) Exxon Mobil Corp shareholders voted for two radical directors, which is expected to push the company towards a more environmentally friendly direction. 2) Shell lost an important case over carbon emissions in a Dutch court, and the new ruling will require Shell to cut carbon emissions by 45 per cent by 2030 and 72 per cent by 2040, rather than by 20 per cent within 10 years, as Shell had previously promised.

He came to the same conclusion that society is concerned with supply rather than demand, which is the same signal as the IEA reports that there is no new supply.

Rarely do you get such a clear message that policymakers do not say out loud what they expect to happen, but their actions will only lead to one result-higher energy prices. Demand is not subject to any restrictions, they are just reducing supply.

For those who severely criticize me for making this choice, I only ask for one thing-- look at the Canadian documentary Over a Barrel, don't worry-- this is not "climate change unreal" propaganda. In fact, on the contrary, the debate over the oil sands may bring more benefits to the oil majors than you think.

How to trade?

Even if there are no supply restrictions, I may have a positive view of oil prices, but the IEA's recent statements and other similar decisions are only the last of this drama.

Today, WTI futures prices hit another three-year high, it seems to have risen a lot, but to me, the trend is very much like the eve of a new round of outbreak. This is a unique opportunity to provide a very attractive profit-to-loss ratio.

Energy has become my largest position, and I have made some more crude oil futures, but today I have bought a number of forward crude oil futures for different years. December is the most liquid futures contract, so I put my main positions in 2023 and later December contracts.

The company has different crude oil futures and recently launched a mini-WTI crude oil contract, which is very suitable for individual investors to bet on crude oil because of its low value.

Figure: CME crude oil & gasoline futures product parameters

For non-futures investors, long crude oil can be done through USO and other similar ETF. Normally, these ETF mainly hold near-month crude oil futures, which results in a completely different rate of return from holding forward contracts because of the frequent extension of recent contracts.

USO may be good, but for investors with high risk appetite, consider the 2-year call option of USO's 2-year LEAPS or WTI crude oil forward futures.

As you can see from the chart below, the orange line is the implied volatility term structure of WTI-it contains the implied volatility of futures with different maturity dates. This chart can simply compare the difference between long-term volatility and short-term volatility, and give us a reference for choosing the term of the option.

Due to data limitations, we cannot see the two-year volatility, but from the chart below, the one-year volatility is not much higher than the recent month contract, so forward options are a good choice without paying too much forward premium.

Besides crude oil futures, Canadian energy companies such as SU and MEG are also good targets. I like SU because it has a lot of oil sands and a lot of downstream business.

Like MEG, because you can't get through this cycle without owning it. Husky tried to buy MEG a few years ago, but shareholders demanded a higher price, and eventually voted down the deal, hoping that Heskey would come back with a higher offer, but that didn't happen.

Fortunately for us, MEG has decent assets and is still one of the targets that can be acquired by oil giants desperate for growth opportunities.

Last

Usually, the supply and demand of a commodity may be attractive, but the macro environment is against you, or the government is against you.

But now, it is rare for the macro environment to resonate with the fundamentals of the industry. Not only is supply and demand fundamental for crude oil, but the macro environment and government policies to deal with climate change also support oil prices, like a plate of hot biscuits with a glass of cold milk and ice cream.

I'm actually a little scared, and the deal looks so clear.

When I recall similar situations in the past, my mistake is often because I bet too much because of my high self-confidence, and eventually I am unable to withstand the inevitable fluctuations.

Although this is my largest position, my position allows me to survive a considerable pullback. I will use long-term options whenever possible. Over the years, I have come to realize the benefits of having such options, which are embedded with a money management system (long positions fall as long as they fall) without exposing me to the loss of short-term options ("Theta").

I agree with Louis that oil prices have seen $100 in this cycle. Recent developments have made this appeal louder. I don't expect a 20% or 30% return on this deal in a short period of time. Although oil and energy stocks have more than doubled in the past six months, I believe they can easily double again.

If we have learned anything in the past year, it is not to underestimate how crazy a bull market or bubble can be.

Edit / irisz