Oil Prices Rise as Israel Attacks Iran's Nuclear Facilities - What We Do
Commodity Report #210
*YTD our absolute return strategy is up 12,0%
Oil Prices Rise as Israel Attacks Iran's Nuclear Facilities - What We Do
Friday was marked by panic buying safe haven assets. Gold and Crude went up, risk assets went down. We’re now in a time of mass geopolitical uncertainty and related volatility. Therefore we think it is important to keep a cool head in such situations and don’t let headlines and breaking news change investment behavior.
Therefore we’ll fade the move. But not the oil or gold price directly (being short gold in this decade isn’t a good idea in general) - instead we focus on grain-commodity prices that shoot up on Friday with the news but in our opinion due to mostly unrelated cause. What we saw was basically panic buying, and we saw that behavior during the last years over and over again.
We find that setup especially interesting, as the global weather pattern is currently in an ENSO-neutral state, which favors the odds that grains will trade within its typical seasonality pattern.
We’ll execute these setups by our clear rulebook, not by emotions or feelings and in line with the current trend direction regime of the particular grain-market.
As you can see in the CTA positioning picture below, fading the recent move with a suiting risk management strategy is also justified according to large investor positioning.
Here are a few posts I found quite informative regarding the Iran situation:
"With hindsight, every oil-price rally has proven to be an opportunity to sell. It required nerves of steel, but shorting crude while bombs and the missiles were flying was the winning trade", Javier Blas wrote in an opinion piece on Friday. I thought he put that brilliantly.
The market volatility is in our opinion mainly due to fears that Iran could close the “Strait of Hormuz” - one if not the most vital passage way for refined oil products. From a macro perspective, we should keep in mind that any major spike in oil prices caused by a closure could draw backlash from Iran's largest oil customer: China. China is the number one importer of Iranian oil, reportedly accounting for over three-quarters of Iran’s oil exports. The world's second-largest economy is also Iran's largest trade partner.
News regarding that topic will be the driving fear factor of commodity prices during the week.
CTA Positioning
CTAs have a clear risk-off positioning in commodities: long precious vs. short industrial metals, energy and agriculturals. UBS still expects decent risk reduction in Precious and Energy. *Note UBS published this outlook before the Israel attacked the Iran’s nuclear facilities
Contrarian trades according to UBS are: bullish Cotton, Nickel, Wheat and Energy, bearish Gold, Cocoa and Lean Hogs. Go with momentum trades according to the investment bank continue to be bullish Coffee, bearish Sugar and Soybean.
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In Other News…
Tropical forest loss almost doubled in the last year of available data, rising from 3.74 million hectares (Mha) lost in 2023 to 6.73 Mha in 2024, according to the World Resources Institute.
The primary driver of tropical forest loss in 2024 was wildfires (49.5%), followed by agriculture (29.1%).
This week, look out for the following:
Retail Sales on Tuesday
Fed Rate Decision on Wednesday (expected: rates will be held at 4.50%)
US Bank Holiday on Thursday (National Independence Day)
Philly Fed Manufacturing Index on Friday
Institutional Services
If you’re an institutional investor that wants to commit money into our strategy, receive a portfolio-overlay or copy our strategy to participate directly from our framework - contact us via info@lukas-kuemmerle.com
Till next Monday, Lukas
If you have any questions in the meantime, please feel free to contact me via X or Mail.