Market Factors: $60 oil and six other ‘high conviction’ commodity trade ideas

Citi’s commodity strategist helpfully provided a series of trade ideas which I’ll review today and I’ll attempt to describe the best infographic I’ve seen in a research report this year. Later, I’ll discuss how a group of developers have built a forecasting AI program that might replace all market strategists.

Hard assets

Citi commodity strategist offers seven trade ideas

Citi global head of commodities research Max Layton published seven “high conviction” trade ideas with his most recent marketing presentation. Not surprisingly given a softening global economic environment, the list includes bullish and bearish ideas.

Mr. Layton is very bullish on silver. He notes that 40 per cent of silver production is used for solar panels and electric vehicles, both growing industries. China is seeing strong silver demand as a store of value after real estate, previously the most popular investment, weakens. The strategist sees 20 per cent upside for the precious metal before year end.

Citi is very much not bullish on oil. Mr. Layton recommends using any hurricane-related price strength to sell crude. He believes OPEC will maintain current production levels and that the global oil market will be in surplus by the first half of 2025. Citi expects to see Brent crude averaging US$60 per barrel in the next 12 months.

Mr. Layton also likes gold. He expects physical demand for gold investment to rise nine percentage points to 83 per cent of total world production in 2024 – and rise another two percentage points next year. Physical demand from public and private sources is at the core of his price model. Federal Reserve rate cuts, which will reduce inflation-adjusted yields available in fixed income, should drive ETF-related gold demand, and push the commodity price to US$3,000 per ounce.

The fourth commodity trade idea is not for the average investor but Mr. Layton is urging clients to trade the spread between Japan Korea Marker liquid natural gas futures (the regional benchmark) and European natural gas. Asian prices are likely to strengthen in order to attract LNG shipments to the area.

Citi expects the dour situation for lithium prices to alleviate. The strategist forecasts a 20 to 25 per cent increase in the commodity price in the next three months as supply curtailments take hold. The lithium market will be in deficit in the very near term but Mr. Layton is much less bullish on prices six to 12 months from now.

The strategist is also bullish global raw sugar prices as India’s government announced curbs on exports. This trade idea, however, is not an easy one to isolate for most investors.

A long term bullish view on copper is the seventh and final high conviction trade idea. Citi expects that eventually Fed rate cuts will help accelerate the global economy and, by extension, copper demand.

Date centers

Best infographic of the year has investment ideas

Andrew Obin covers multi-industry industrial stocks for BofA Securities and he recently published the best infographic I’ve seen in a research report this year. It’s called Who Makes the Data Center – 2024. It shows a bird’s eye view of a roofless data center, with all the important industrial components and the companies that sell them. They sold a lot of them in 2023, too, as Mr. Obin estimates that US$215-billion was spent on data centers.

I was surprised to see how much of a data center consists of power equipment. This includes the obvious, generators, provided by Caterpillar, Rolls Royce and Cummins.

Schneider, Vertiv and Eaton sell power distribution units, switchgear (ABB also provides this) and uninterrupted power supply components.

Engineering is provided by Jacobs, Burns and McDonnell and WSP Global and construction is contracted to Turner, Holder and HITT. Dell, Hewlett Packard and IEIT Systems sell servers, Arista Networks, Juniper Networks and Cisco Systems do networking. Cooling towers are sold by SPX Technologies, Ebara and Kelvion and added chillers are provided by Johnson Controls, Trane, Carrier and Daikin. Vertiv, Stulz and Johnson Controls sell CRAH equipment – computer room air handlers.

It would be convenient if I could post the graphic on social media for everyone to see but there’s a non-zero chance BofA would send a hit person after me. As a general rule, economist and strategist material is more distributable because they frequently provide a marketing function for the entire research department. Analyst content is often considered more proprietary.

Diversions

Market forecasts will soon be automated

Finance professor (among many other things) Michael Mauboussin’s lectures include one asking roughly 75 students to guess the number of jellybeans in a fishbowl. Few of the guesses were close but the average of all the guesses was off by only 3.1 per cent or 35 jellybeans in a jar with roughly 1,200 in total.

A group of developers featured at the Center for AI Safety developed a program that uses this wisdom of crowds approach to automate forecasting they named FiveThirtyNine (a reference to Nate Silver’s FiveThirtyEight forecasting site).

When prompted with “Will Trump win the presidential election?” the program searches for news and opinion articles and compiles a series of prioritized facts. The facts are sorted in two buckets, one supporting a negative answer and the other the positive.

Next, FiveThirtyNine “aggregates its considerations while adjusting for negativity and sensationalism bias in news sources and outputs a tentative probability. It is asked to sanity check this probability and adjust it up or down based on further reasoning.”

In a series of tests, the program was equally successful at forecasting as a group of experts, supporting the developers’ belief that most forecasting, including for the market one assumes, will soon be automated.

The essentials

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Globe Investor highlights

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As the U.S. Federal Reserve begins its much-anticipated rate-easing cycle, some major investors and analysts believe interest-rate cuts in the months ahead may be shallower than the market expects. Meanwhile, here are hypothetical trading ideas shared by three hedge funds for the start of a U.S. easing cycle.

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What’s up next

Domestic retail sales ex-autos for July will be reported Friday and as I’ve mentioned before I think it’s among the most relevant data points for the current environment. The more financial stress households feel from mortgage renewals, the lower retail sales will be. Consensus estimate is for a 0.3 per cent rise month over month.

Month-over-month industrial production for August will also be released Friday – a 0.2 per cent decline is expected.

The U.S. calendar is light for the next 10 ten days or so. The August leading index of economic indicators will be posted on Thursday with a negative reading of 0.3 per cent expected. The Richmond Fed manufacturing index for September is out on the 24th.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)