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

Ola Hansen, Chief Commodity Strategist at Saxo Bank, discusses the significant implications of the Iran conflict on energy markets, particularly the disruption in energy and refined products like diesel and jet fuel. He emphasizes the Middle East's critical role in global energy production and its expansion into refining and commodity production, which is essential for understanding broader energy market dynamics. The crisis raises concerns about energy-intensive commodities such as aluminum and fertilizers, which rely heavily on gas, and the potential shortage of sulfuric acid for copper extraction, with half of the supply sourced from the region.

The uncertainty surrounding the crisis's duration is notable, with forward curves in energy markets suggesting it may persist longer than anticipated. Current Brent Crude prices are around $80 for December contracts, with expectations of a $10 to $15 increase once the situation stabilizes. Challenges such as logistical issues, refinery damages, and the need to reduce inventory levels before production can resume may delay normalization by two to three months. U.S. crude oil production remains stagnant, raising questions about producers' responses to market conditions.

Hansen explains the implications of backwardation in commodity trading, particularly for long-term investors. In backwardation, passive long investors can profit from rolling contracts, while in contango, they may face losses. Natural gas trading is particularly challenging due to its tendency to experience steep contangos during seasonal transitions. The performance analysis of commodities from 2016 to 2026 reveals a stark difference between spot index returns and total returns, underscoring the importance of backwardation for investors.

Insights for crude oil investors reveal a substantial difference between front month and December 2026 contracts, reflecting market tightness and geopolitical factors. Hedge fund positioning has shifted from a net short position at the year's start to increased buying, particularly in Brent, which aligns with global market conditions and contributes to heightened backwardation. Recent market corrections of $5 to $10 are largely attributed to hedge funds' speculative behavior, contrasting with retail investors who tend to hold onto losing positions.

The conversation shifts to the fertilizer deficit impacting crop yields, with American and European farmers struggling to access sufficient fertilizer, raising concerns about diminished crop yields and higher prices. Weather conditions will significantly affect crop production, and adverse weather combined with limited fertilizer availability could lead to downgrades in production. The agriculture sector has seen low returns recently, and rising costs of fertilizers and diesel further challenge farmers.

Trading strategies during the Northern Hemisphere's planting season are discussed, including potential trades on December 2026 futures based on this year's planting outcomes. The long-term effects of the current crisis suggest a shift towards secular inflation, with commodities playing a significant role in this environment. The Bloomberg Commodity Index has risen nearly 160% since the pandemic low in 2020, reinforcing the case for holding hard assets.

The energy sector is poised for growth, benefiting from a higher price floor and a notable increase since 2021. Historical commodity cycles suggest we are in the middle of a 10-year cycle, potentially influenced by the energy transition and rising electricity demand. However, high prices may deter demand, raising concerns about the supply side's responsiveness to price increases.

The impact of the 2022 Russian invasion of Ukraine has spurred demand for renewable energy due to elevated fossil fuel prices. Gold is viewed as a geopolitical hedge, although recent market reactions have shown volatility. Current corrections in gold prices are being monitored closely, particularly in relation to oil-driven inflation signals and dollar movements. Copper is highlighted as a less volatile investment with strong demand fundamentals, influenced by recovery in China and supply challenges.

Hansen discusses the potential for supply disruptions in the crude oil market due to U.S. sanctions on Iran's oil exports, with broader economic implications. He emphasizes the importance of monitoring the situation in Iran, as any escalation could significantly affect global oil supply and prices. The conversation touches on the broader implications of the Iran crisis for investors, suggesting that a diversified approach to commodities could mitigate risks associated with geopolitical events.