Commodity roll yields drive expectations for a strong 2021

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities, are increasingly looking towards the post-pandemic recovery in global growth and demand. In addition, the sector has already benefitted from a strong recovery in Asian demand led by China while weather concerns have lifted agriculture commodity prices. Investors are also focusing on the impact of continued fiscal and monetary spending and with that the risk of a weaker dollar and rising inflation. While the spot market fluctuates with short term demand and supply developments, the forward curves are increasingly pointing towards a strong 2021 for commodities.


Commodities have witnessed a strong rally during the second half of 2020. The rally has taken the Bloomberg Commodity Index higher by 15% and has been driven by several and to some extent lasting factors. Apart from a natural normalization following the Covid-19 led slump earlier this year, the sector has also benefitted from a strong recovery in Asian demand led by China and weather concerns lifting agriculture commodities. In addition to this investors are also focusing on the impact of fiscal and monetary spending and with that the risk of a weaker dollar and rising inflation.

Source: Saxo Group

The first eight years of this millennium I worked in London for a multi-asset CTA heavily exposed in commodities and during this time I witnessed at firsthand, the emergence of China as an economic super power gulping up raw materials of all kinds to feed its growing economy. These were the boom years where tight supply helped drive a price surge with the Bloomberg Commodity Index rising 160% from 2000 to the peak in 2008, just before the global financial crisis sent it into a tailspin from where the sector has struggled to recover ever since.

Sharply higher prices during that decade gave a massive boost to producers who responded to rising prices by increasing capacity and production. What followed after the 2008 crash was a decade of technological innovations which drove a surge in U.S. shale oil production while farmers managed to increase yields and production of key crops. These developments together with an increased number of mining projects coming online, led to a near six year period up until now where ample supply kept many commodities in a constant state of contango, a futures curve structure where the spot price is the cheapest due to oversupply.

During this time long only portfolios replicating the performance of the major commodity indexes such as the broad Bloomberg Commodity Index and the energy heavy S&P GSCI Commodity Index have been exposed to an annual cost of holding and rolling positions (negative carry). This combined with a generally stronger dollar and limited inflation risks have led to a near decade with small returns. During the past few months however, we have witnessed an emerging change in the attitude towards commodity investments.

The agriculture sector has rallied strongly on weather worries and strong export demand, metals have once again been gulped up by China while the energy sector has started to gear up for a post-pandemic recovery in global fuel demand. Precious and semi-precious metals have seen increased demand as a protection against policy mistakes and reflation risks. The impact on the futures forward curves can be seen in the table above.

One year ago the cost of holding (and rolling) a futures position in corn, sugar, soybeans, soy oil and soymeal all cost more than 5% on a 12 month basis. Fast forward to today and these commodities now give a positive carry of between two and more than ten percent. A general improvement has been seen elsewhere with Arabica coffee, gas oil and natural gas still the most expensive to hold from a roll cost perspective.

Looking across 26 of the most traded commodity future, the one year roll has now returned to zero for the first time in more than six years. The charts below show improvements across all three sectors led by agriculture followed by metals, both precious and industrials, and energy. The energy sector especially has seen a sharp improvement since November 9 when the first of several vaccine news helped raise the prospect for a return to normality sometime in 2021.

    Looking into 2021, we see fundamental support for energy and industrial metals as the cyclical comeback spreads outside of Asia as the pandemic loosen its grip. The agriculture sector may see upside price risks as weather problems extend into the new year, not least due to the ongoing La Ninä weather pattern which is already causing problems for growers in South America. Finally we do no see an expiry to the bullish case for gold with central banks continuing to keep financing rates at rock bottom low levels, the dollar increasingly at risk of weakening while the need to hedge against rising inflation risks will add continued support, not only to gold and semi-precious metals, but the commodity sector as a whole.

    From an investment perspective an exposure to the commodity sector can be achieved through ETF’s or CFD’s tracking the major indexes. Please note that some regional restrictions apply with regard to the availability of products relative to your investment status, either as a retail or professional investor.

    The table below shows the three biggest ETF’s but plenty of other exists. Generally for most however, is that the underlying exposure being one of the three mentioned indexes. Note that a preference for energy and metals should be expressed through the S&P GSCI Index which is very energy heavy (62%) while a general protection against inflation may best be achieved through the Bloomberg Commodity Index due to a bigger diversification and smaller exposure to commodities, such as energy, which still has a negative carry. 

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