All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds and large money managers increased bullish bets across 24 major commodity futures by 3% to 2,358k lots.
Given the strength of the recovery a relatively small increase that was led by crude oil (25k), gas oil (17k), natural gas (+11.7k), corn (21.9k) and sugar (12.5). Other contracts such as copper (-6.3k) and both wheat contracts (-5.7k) were sold despite recording strong price gains. Potentially a sign that investors despite being dictated by the price action to be long are feeling somewhat uncomfortable with prices at multi-year highs and breakeven yields (inflation) that has been drifting lower during the past three weeks. Commodity is the best performing so far in June driven by rising commodity prices. While rising oil prices have stolen attention lately we explain why investors should ignore the this rally in oil and gas majors. Instead we think investors should look long-term and bet on copper as it will become the new oil of our future greener society.
The energy sector today is still dominated by “old oil” companies and we have recently got questions about whether to invest in this industry since the industry has become cheaper relative to the overall market. While it is true the energy sector has become cheaper against the overall equity market and the outlook has improved with the rollout of Covid-19 vaccinations, the overall energy sector is trading at 12-month forward EV/EBITDA of 6.5, which is above the average since 2005. This period includes many years of far better fundamentals in terms of return on capital than what the industry can generate today.
The “new oil” that will fuel the green transformation and electrification of our economy is copper, which is much more intensely used than in our old industrial economy. Commodity analysts are split on the demand-supply balance, but from an equity perspective it matters more long-term what the demand outlook is.