The New Commodities Supercycle

JC Parets
January 21, 2021

What would it take to finally end the long-term bear market in commodities?

How about Crude Oil Futures trading below zero?

Yes, remember when Oil traded in the negatives last year?

This is something most of us never thought was possible. If you had this on your list of possibilities, kudos to you I guess.

I didn't.

Here we're looking at a chart of the CRB Commodities Index relative to the S&P500. So in other words, the blue line is Commodities vs Stocks. The CRB Index has a heavy weighting in Oil and Energy, so look how both of these reversed at the exact same time, AFTER Crude Oil traded below zero.

Now let's zoom out. Look what's been happening since 2008, after Crude Oil Futures traded up near 150/barrel. Stocks have been on a parabolic run vs commodities as an asset class:

Was Crude Oil trading below zero the parabolic top for Stocks relative to Commodities?

Is this structural bear market in commodities finally over? It would certainly be ending near a perfectly logical level.

Here are the most recent monthly charts for both the CRB Commodities Index and Crude Oil, it's largest component.

The squeeze is on...

If the CRB Index is above its 2016 lows and Crude Oil is above all those former lows from the past decade, how can we be bearish commodities?

I can't.

We're in!

We covered a slew of commodities on this week's conference call, from Energy to Metals and even Ags. Most of them, except Gold, have been breaking out. The replay of the call and slides to download can be found here for Premium Members.

What did it take to finally end this bear market?

I think Crude Oil trading below zero was a great start.

We still get emails from readers about how Crude Oil Futures could possibly trade below zero. How is that possible?

Here is the best explanation I've heard. It was all over reddit so I can't figure out who to give credit to. Sorry. Please contact me if it was you and I'll give you a shout.

Anyway, here's the best way to think about

Why WTI Crude Oil traded at minus -$37

Imagine the following...you pay $500 today and commit to receiving an escort at your house in 15 days because your wife is traveling and away for a few days. This is called a futures contract.

Unfortunately, lockdown came and your wife will now be home for the next 60 days.

You do not want this woman to show up at your house at all and try to pass this futures contract to someone else.

Only you cannot sell this commitment because nobody can receive the escort at home anymore. Everyone is in full storage with wife.

To make matters worse, not even the pimp (Chicago Mercantile exchange) has more room to receive girls because his house is crowded with girls.

So you will pay anyone just to take the girl off your hands.

Do you now understand why oil has a negative price when the contract is delivered?

I hope this explanation helps.

It certainly helped me wrap my head around it.

JC

 

 

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