[This blog post is a brief excerpt from a recent commentary at https://speculative-investor.com/]

In the 10th June Weekly Update we discussed the potential for the El Niño currently underway to become the “super” variety, with major adverse consequences for food production around the world and especially in Asia. Before we provide an update, here’s a brief description of the El Niño and La Niña weather phenomena from the article linked HERE:

“Normally, Pacific trade winds blow west across the equator, carrying warm South American water toward Asia. Cold water then “upwells” from the depths to replace the warmer surface water that’s been pushed away.

El Niño is a natural climate cycle that disrupts this pattern. It’s triggered by weaker-than-usual trade winds — winds that end up allowing much of that warm water to flow back toward the west coast of the Americas.

Ultimately, that warmer water forces the Pacific jet stream — a high-altitude air current that acts as a 7,000-mile “conveyor belt” pushing storms east across the Pacific toward North America — to move south of its usual path, altering weather patterns across the U.S. and the globe.

La Niña is the exact opposite: stronger trade winds, colder water and a Pacific jet stream that moves north rather than south.

El Niño and La Niña happen roughly every two to seven years and last nine to 12 months. El Niño generally arises more frequently than La Niña.”

This year’s El Niño stands a good chance of becoming strong enough to qualify as “super”, meaning that surface temperatures in the Pacific are on track to become much warmer than would be the case in an average El Niño. Super El Niños are relatively rare, typically occurring every 10-20 years. However, as discussed in our 10th June commentary, a Super El Niño combined with other natural climate cycles could result in weather conditions during 2026-2027 being similar to those of 1877-1878, when Asia experienced the worst drought in centuries.

Evidence regarding the likely consequences of the 2026 El Niño will start to become available by August, because by that time it will be possible to make an initial assessment of India’s monsoon season. In particular, much less rainfall than usual in India during June-July (the first two months of the monsoon season) would increase the risk that an event of similar severity to 1877-1878 is in store.

The broad correction in the commodity markets that began in April could continue for a few more months, but as we mentioned last month, a “super El Niño” probably would result in grains and other crops being among the first commodities to resume their longer-term bullish trends. Therefore, over the months ahead we will be looking for opportunities to add more agriculture-related exposure to the TSI Stocks List.

[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]

After the war against Iran broke out in late-February, we thought that the oil market was under-estimating the scale of the oil supply problem and that a price of US$150-$200/barrel would likely be seen in the US futures market if the war continued for more than a few weeks. However, by the first half of April — with the war still very much in progress — we thought that the crisis essentially was over and that oil’s price spike to the US$120s in early-March would turn out to be its peak for the year. This was based on the price pattern and the progress of the war. As the oil price subsequently made progressively lower highs and the futures curve flattened, we became more convinced that the early-March peak was, indeed, the intermediate-term variety, while any remaining doubt was removed as soon as the US-Iran MOU was put in place. Some oil market analysts, though, maintained their $200/barrel price forecasts throughout the downward price trend and are still talking-up the short-term risk of a price rise of that magnitude. Why have these forecasts been so wrong and why, in all likelihood, will they continue to be wrong?

After the start of the war, several actions were taken that helped ‘fill the void’ created by the closure of the Strait of Hormuz (SOH). On the supply side, most of these actions were obvious and accounted for in price forecasts. Examples include Saudi Arabia re-routing oil from its east coast to its west coast via pipeline and oil being released from strategic reserves. The mistakes were on the demand side and the biggest of these was to not account for China reducing its oil imports by more than 5M barrels/day.

We started writing about the large reduction in China’s oil imports in early May, which also is when related articles started to appear in the press. But if this information was starting to appear in the mainstream media during the first half of May, it’s reasonable to assume that large traders in the oil market had been aware of it and had acted on it much sooner. In more general terms, when you discover information in the mainstream financial press (Financial Times, Wall St Journal, Bloomberg, etc.), you should assume that the information already is reflected in market prices.

Another mistake worth highlighting is associated with global oil inventories. We keep reading about plummeting inventories and storage tanks rapidly emptying, which creates the impression that the world will soon run out of oil. The reality, though, is that commercial oil inventories are not materially different today than they were at the start of this year. To further explain, there have been large inventory drawdowns, but only in the inventories (strategic reserves) managed by governments. This means that there will be no need to replenish the inventories in a hurry.

An important related point is that the reduction in the US Strategic Petroleum Reserve (SPR) accounts for about 75% of this year’s reduction in global strategic petroleum reserves. This is important because the US does not need a strategic reserve, so the US government could take as long as it wanted to replenish the SPR or simply choose not to replenish it.

Therefore, what’s being touted as a dangerously low inventory situation is a non-issue.

All of which brings us to a critical point: At any given time, the most accurate assessment of the current supply of oil relative to the demand for oil is provided by the slope of the oil futures curve, that is, how contract prices change as delivery months become more distant. The slope of the futures curve tells you the extent to which the market is well supplied, while the change in the slope over time tells you whether the supply situation is becoming tighter or looser. For example, there were times between early-March and early-April when the price of the nearest oil futures contract traded more than $40/barrel above the price of oil for delivery nine months later, indicating a severe shortage of physical oil, but the difference between these contracts has since trended lower and is now only about $3. This suggests that although the oil supply situation is still tight, the extent of the tightness has reduced dramatically. Moreover, it continues to move in the direction of increasing abundance.

Summing up, when it comes to assessing current oil supply relative to demand, the futures curve is vastly superior to any analyst.

[This blog post is a slightly modified excerpt from a commentary published at https://speculative-investor.com/ last week]

Assuming that the US-Iran Memorandum of Understanding (MOU) remains in effect and the Strait of Hormuz (SOH) reopens as agreed, the prices of equities, industrial metals and gold could have an upward bias for a few more weeks. If so, it would be reasonable to view this period of relative buoyancy as an opportunity to reduce portfolio risk by building up cash. Doing so would result in an opportunity cost if prices were to continue trending upward, but it would both mitigate the financial consequences of sizable corrections and enhance the ability to take advantage of future price weakness. After all, it’s always easier to buy low if you previously sold higher.

The overarching issue right now is that financial market liquidity is ebbing while high-profile inflation indicators such as the CPI are poised to stand in the way of decisive actions by central banks to bolster liquidity, potentially paving the way for meaningful price weakness within the next few months. We note, in particular, that currently all the world’s most influential central banks are either actively tightening monetary conditions or on hold*, while the gold and crypto markets have been warning for some time about declining liquidity. Also worth noting is that massive IPOs will in effect be shifting demand from the stock market to real assets. For example, the SpaceX IPO transferred US$75B from stock market investors to the company — money the company will now spend on building datacentres, rockets, etc. The same thing happens when instead of spending money on stock buybacks, companies such as Microsoft, Alphabet, Meta Platforms, Oracle and Amazon spend the money on AI-related infrastructure.

Furthermore, it’s likely that the markets have gone a long way towards pricing-in the best-case outcome for the conflict in the Middle East, leaving far more scope for a negative surprise than a positive one.

With regard to industrial commodities, our concern is solely about the short-term, because much higher prices remain likely over the coming 1-2 years. In fact, an implication of the intentions outlined in the US-Iran MOU is that the future demand for many industrial commodities will receive a significant new boost. The boost will come from a privately financed US$300B development fund that will be established to rebuild Iran and that will, if implemented as envisaged, help to integrate Iran into the global economy. This aspect of the deal has been widely criticised, but it is extremely positive. The greater the amount of trade with Iran and the more that foreign companies/investors are involved in Iran’s reconstruction, the lower the probability of another war.

*The Fed is on hold with regard to interest rates, but the new Fed Chair is considering a balance sheet reduction. At the same time, a substantial monetary tightening is underway in China and both the ECB and the BOJ are hiking interest rates.

[This blog post is an excerpt from a recent commentary at https://speculative-investor.com/]

To promote last week’s IPO of SpaceX, some extraordinary forecasts were made. For example, SpaceX founder Elon Musk said that by 2030 the company could be deploying 100 gigawatts of solar-powered artificial-intelligence datacentres into orbit every 12 months. According to the IPO prospectus, this “will require thousands of launches per year and the transport of approximately one million metric tons to orbit annually”. While these prognostications are far from realistic, they do indicate that massive spending on datacentres will continue. Rather than being built at a huge cost in space to take advantage of free energy from the sun, they probably will be built at a small fraction of the cost in Alberta to take advantage of cheap natural-gas-generated power. However, the point is that they will be built. If so, the demand for some commodities will rise substantially over the years ahead, resulting in much higher prices in order to incentivise additional supply.

Of the commodities for which there should be large increases in demand associated with the building of datacentres, up to now we have focussed on REEs, lithium, tin, copper and natural gas. We also are interested in vanadium, which currently is used mainly for hardening steel but probably will be used increasingly for stationary energy storage. For lithium and natural gas there is the potential to ramp-up supply in response to higher prices, limiting the magnitudes and/or durations of bull markets, but that’s not the case for REEs (especially Heavy REEs (HREEs)), tin and copper. Tin, in particular, is at risk of a significant supply disruption due to the Ebola outbreak and political instability in the Democratic Republic of Congo (DRC), the country with the world’s 5th largest production of the metal.

At the moment we are intermediate-term bullish on many commodities, because a broad bull market in commodities is underway and probably will continue for another 1-2 years. However, we suggest being particularly alert to opportunities to purchase the shares of companies involved in the production, or the development of new production, of HREEs, tin and copper. That’s because these are metals that will be integral to the datacentre buildout and for which it will be very difficult or time-consuming to ramp-up supply. Currently, the TSI Stocks List has exposure to HREEs via Aclara Resources (ARA.TO), European Lithium (EUR.AX, EULIF) and Neo Performance Materials (NEO.TO), exposure to copper via Cyprium Metals (CYM.AX), US Gold Corp. (USAU) and Vizsla Copper (VCU.V), and exposure to tin via Metals X (MLX.AX).