Commodities are coming back

One lesson I’ve learned from trading commodity futures is that fundamentals are important, but sentiment and capital flows are what move the market. We saw enormous capital flows into commodities in 2021 due to tight supply, the Russia-Ukraine war, and the zeitgeist around inflation and supply chains. However, sentiment overshot to the upside, and we have spent the last year and a half unwinding some of those excesses.

Now commodity charts are turning back higher. Despite the economic slowdown and the Fed tightening cycle, supply-demand fundamentals look tight or balanced across many commodity markets. Weather and geopolitics continue to be right-tail risks, and the indefinite delay of a recession may attract capital flows back into commodities and start a sustainable uptrend.

Let’s look at some charts:

WTI oil has broken channel resistance and its 200 moving average. The Fidenza Macro portfolio is long.

CTAs have been covering their shorts in Brent and have a lot of room to increase longs.

Source: GS via Market Ear

Similar picture in WTI futures

Source: BofA via Market Ear

Gasoline has broken out of a narrowing base

Energy equities have been going sideways for a while but ETFs like XLE are now turning higher.