By David Schassler
Head of Quantitative Investment Solutions
We expect oil to hold its value due to significant supply-demand imbalances, with the anticipated risk from economic downturns overstated despite investor apprehension from past recessions.
We have been super vocal about the opportunities available in commodities. There are significant and structural supply and demand imbalances across the commodity markets that, we believe, will result in higher prices for an extended period of time.
On July 11, we were invited on Bloomberg Radio to discuss commodities. We laid out our bullish call on energy prices and how that will put upward pressure on inflation.
Here’s the link to the recording; skip to the 9-minute mark.
Oil prices have strengthened considerably lately. We’ve been calling for this for a while now. Here are some key reasons why we think oil prices will remain strong:
- Supply is tightening as oil companies adjust to weaker prices, higher costs, and returning cash to shareholders. The chart below illustrates rig counts in the U.S. As you can see, energy firms have consistently cut the number of oil rigs in operation. This is a forward gauge of future output, and it tells us that supply will fall.
US Crude Oil Rig Count
Source: Bloomberg. As of 8/1/2023.
- OPEC+ has agreed to cut oil production in an effort to support oil prices. In July, Saudi Arabia and Russia, the world’s largest oil exporters, announced further cuts to support prices.
- Oil prices have been under pressure from the draining of the strategic petroleum reserve to 40-year lows. While we do not know how the near term will unfold, it is more than evident that, at best, this is not a long-term solution to higher energy prices, and we should not rely on the government to tame energy prices in perpetuity.
The risk to oil and other commodities, in the short term, is the economy. But—given the broad expectations of a shallow recession—we think that risk is severely overstated. The chart below demonstrates that commodities have historically fared well during recessions, with the exception of the unusually deep recession caused by the 2008 Global Financial Crisis (“GFC”). And, when high inflation is present during a recession, as we experienced in the 1970s, commodities performed very well. The COVID-19 commodity correction does not show in the chart because it was a short-term price shock that quickly recovered.
Annualized Returns During Recession
Source: Bloomberg & NBER. As of 6/2023.
To understand why commodity prices have generally performed well during the “typical” recession, let’s look at the historical demand for oil. The chart below demonstrates that the oil demand is relatively inelastic. Meaning that, with the exception of truly extreme events, such as 2008 and COVID-19, oil demand is relatively unchanged. We love to complain about high gas prices, but that doesn’t stop us from driving.
World Oil Demand
Source: OPEC. As of 4/2023.
So—what’s up with the narrative that commodities are particularly vulnerable during economic contractions? Recency bias is when we look at recent events and assume they will happen again. In this case, investors are still scarred from the commodity corrections of the Financial Crisis and COVID-19 and are assuming that the next recession will bring a similar result.
The point here is that unless you are calling for a super draconian recession, and very few that we meet are, then, in our view, commodities offer the potential for significant diversification and performance benefits.
Commodities were not the place to be in the first half of 2023. Year-to-date, through June 30, the S&P 500® Index returned over +20% while commodities were virtually flat. During this period, the VanEck Commodity Strategy ETF (“PIT”) returned +2.51%, and the Bloomberg Commodity Index (“BCOM”) returned -2.02%. And investors have noticed. As of June 30, there have been net outflows of $5 billion from broad commodity ETFs and mutual funds.
We expect the second half of the year to look nothing like the first half, and with commodities far outpacing stocks in July, it is already starting to work out that way. In July, PIT returned +9.71% and outpaced the +6.26% return of BCOM. This brings the year-to-date performance of PIT and BCOM to +2.51% and -2.02%, respectively.
| 1Mo | 2Mo | YTD | 1Yr | 3Yr | 5Yr | 10Yr | Since Inception (12/20/2022) | |
| PIT (NAV) | 9.71 | 7.35 | 2.51 | — | — | — | — | 3.77 |
| PIT (Share Price) | 9.74 | 7.46 | 1.35 | — | — | — | — | 3.80 |
| Bloomberg Commodity Index (BCOM) | 6.26 | 4.32 | -2.02 | — | — | — | — | -1.11 |
PIT Gross Expense Ratio: 0.60%
Source: VanEck. As of 7/31/2023. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.
What is the PIT ETF, and why has it outperformed?
VanEck Commodity Strategy ETF (PIT) was created because we believe that this asset class offers an ideal environment for active management to succeed. Commodity prices are volatile, differentiated, and have repeatable patterns. If approached with a well-disciplined and risk-controlled framework—there are many levers to pull in pursuit of outperformance.
PIT is an active commodity strategy that invests based on a quantitatively driven process. Each day, armed with our quantitative investment tools, the investment team hunts out perceived opportunities across a wide range of liquid commodities. More specifically, it allocates across energy, agriculture, industrial metal, and precious metal commodities based on: (1) the relative risk and returns of each commodity; (2) the shape of the commodity curves; and (3) mean reversion. Additionally, across each commodity, the roll methodology aims to profit from inefficiencies in the futures curves by allocating to the point on the curve with the highest implied yield.
PIT is a new fund with a short track record. It launched in December of 2022 and is off to a strong start. There are many reasons why PIT is ahead of BCOM. PIT has outperformed in energy, agriculture, and industrial metals. Precious metals, due to an underweight to gold bullion, were a modest detractor from performance. The individual commodities that contributed the most to relative performance were:
- Overweight sugar: +38% return
- Overweight gasoline: +12.72%
- Underweight natural gas: -53%
Thank you for reading our latest commentary. Our goal is to provide investors with a timely assessment of current risks, opportunities, and actionable investment ideas. This month we highlighted the attractive opportunity in commodities and encourage investors to look into PIT!
Originally published by VanEck on August 9, 2023.
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Important Definitions and Disclosures
Bloomberg Commodity Index is designed to be a highly liquid, diversified benchmark for commodities as an asset class and is composed of futures contracts on 20 physical commodities.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
VanEck Commodity Strategy ETF (PIT): An investment in the Fund may be subject to risks which include, among others, commodities and commodity-linked instruments and tax, futures contract, U.S. Treasury Bills, subsidiary investment, commodity regulatory, subsidiary tax, gap, cash transactions, liquidity, high portfolio turnover, active management, credit, interest rate, derivatives, counterparty, pooled investment vehicle, repurchase agreements, regulatory, affiliated fund, market, operational, authorized participant concentration, new fund, absence of prior active market, trading issues, fund shares trading, premium/discount, liquidity of fund shares, non-diversified, concentration, municipal securities, money market funds, securitized/asset-backed securities, and sovereign bond risks, all of which may adversely affect the Fund.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
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