Fancy Dancing

My apologies in advance for what is going to be quite technical piece.

In commodities trading, prices for goods to be delivered in the future are either in ‘contango’ or in ‘backwardation’. That is, they are either more expensive in the future than they are today – contango – or less so – backwardation.

Right now, many commodities are in record breaking contango conditions. A lot of factors are pushing this. Low interest rates, cheap rents on storage facilities (ie oil tankers are not delivering the stuff so they become movable temporary oil bunkers) and, probably most importantly, the expectation of profits in about 6 months time as industry starts rebuilding the inventories that have so spectacularly run down in this ‘shock’ stoppage. Oil is in fact the commodity showing the strongest contango condition.

Personally, I always favour a contrarian investment stance. It suits my sceptical disposition. I do not agree with those who see ‘green shoots’ sprouting about the place. There are serious second wave problems due to arrive in the US and EU. The US has serious consumer defaults and state bankruptcies to manage this Summer. The EU has a host of problems to the East of Germany.

This article from Reuters explains why betting against the recovery, that is already priced into the ‘contango-ed’ commodities, might be the smart way to go.

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