US oil stocksJul10.pngAs the chart above from Petromatrix shows, total US stocks of crude, gasoline, distillate and jet kero this year (red line) remain very over-supplied in the short term, by comparison with previous years.
A major reason for this is the move by pension funds to adopt long-only positions in the commodity future markets, in the belief that crude markets are fundamentally tight.
However, this week the Financial Times summarises a timely new study of commodity markets, by Prof Joelle Miffre of Edhec Business School. This argues that investors need instead to understand the difference between:
o Backwardation, “when commodity producers are more prone to hedge than commodity consumers“, and the future price is lower than today’s
o Contango, “when commodity consumers outnumber commodity producers, leading to excess demand“, and the future price is above the current value
They recommend that “to earn a positive risk premium, investors should take long positions in backwardated markets and short positions in contangoed markets“.
The team’s research suggests this strategy would have earned the investor a commodity risk premium of 12% a year between 1992-2008. Whereas the long-only strategies currently followed by pension funds earned only 2% a year. Edhec therefore concludes that “passive long-only strategies as advocated by traditional indexers perform less well“.