Summary

Kathleen is a former commodities fund manager at Tudor and Kingdon Capital and former advisor to the Ministry of Energy of Saudi Arabia. She has a unique insight into oil market fundamentals and OPEC’s policies and plans , benefitting from her attendance at OPEC meetings over the past 3 years. She was early in warning her clients that there were significant disagreements in OPEC which sent the price of oil into freefall earlier this year. Kathleen began the call by highlighting the need to pay closer attention to the distillate market rather than the metals market to determine the overall health of the economy. Distillate demand is more closely tied to industrial activity than copper, which is driven by construction and auto demand. Distillate supplies have surged this year and Kathleen notes that globally distillate demand is the largest part of global demand, even larger than gasoline. Distillate cracks have hit record lows and refineries are cutting runs every day in Europe and Asia. Oil prices moved ahead of fundamentals this summer and Kathleen expects that to correct. For the short term, the market is oversupplied and the second wave of COVID-19 is hurting demand dramatically, which can be seen in the mobility data in Europe. The US hasn’t regained significant enough demand levels to signal a recovery in prices yet. Recently, rigs have gone up in the US, and drilled but uncompleted wells are being completed as companies use their CapEx to do so. Decline rates are still going to take production lower if we don't see more rigs come back. However, Kathleen’s model predicts that rigs are going to continue to increase for the next month between 10 and 20 rigs per week, which means that US production could start to grow consistently next year if this number goes up to 280 to 300 rigs.Last year Kathleen thought that oil demand was going to outpace supply in 2024. However, COVID has shortened and exaggerated commodity cycles. Now, Kathleen expects this to happen in 2022. We're going to see much higher oil prices in the next two years, around the $80-barrel level which has strong implications for inflation, growth, and regional growth. On the metals side, in the short term Kathleen believes we are close to seeing pullbacks in industrial metals. We've now reached a point in global markets where supply is coming back very strongly in a number of different areas. Kathleen believes that is going to result in surplus markets in industrial metals for the next few years. Kathleen points out that there are R&D projects looking into substitution away from metals in construction, housing and auto which would hurt metals demand.On the precious and PGM side Kathleen remains very positive. The reason that gold has consolidated in the last couple of months is because we’re only seeing investor demand driving the move higher and not seeing a return of the physical market yet, but there will be a return of physical demand from China and India, which is going to send gold to new record highs. Gold prices up near $2500 in the next two years is a possibility. For palladium, investor demand is very low, the speculative positioning is very low, and the ETF holdings are very low. So, it seems set up for a particularly strong outcome in the next year or so as the market is in a structural deficit and auto demand is on the rise. On ESG and emissions Kathleen believes we will still be using fossil fuels in 50 years as a baseload. She points to the fact that current infrastructure means that EVs require powering with electricity generated by coal. Meanwhile an increase in car ownership across Emerging Markets will see oil demand continue to rise. Europe and Korea are leading the way in terms of fiscal spend dedicated to electrification, but the process will be slower than many expect. Current interest in commodities is coming from thematic buying brought on by the reflation trade, massive government deficits and a weaker dollar. The other driver of demand is coming from governments and individuals stockpiling across oil, copper, and even soybeans, wheat, corn. A commodity super cycle is around the corner not driven by China but the global reflation trade. The pandemic has taken normal commodity cycles and condensed them into much shorter cycles with more exaggerated moves and more opportunities for investors. It’s an exciting time to be in the Commodity space.

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