Amplify Trading: COMMODITIES Outlook 2021

Okay, hello and welcome. Good afternoon, it is Wednesday, 23rd of December, and we've got the third and final installment of our outlook for 2021. And I'm joined by our managing director and co-founder William De Lucy, and also one of our senior traders and who mentors our elite program Tim Duggan. So these two guys definitely trade and invested interest in, in a variety of different commodity products. So they're the best two people within the team to speak on this subject. As per usual, I think to kick off the conversation, I think appropriate to maybe have a bit of recap on what's been a pretty incredible year for— going to kick off with the oil market. And I know you've got a great annotated chart, Tim, of talking about the kind of ebb and flow of the the actual year as a whole. But I don't know, we were just discussing before we came on air, do you remember back on the 3rd of January when the Iranian Revolutionary Guard commander Soleimani was assassinated by an ordered Trump drone strike in the area? And then that was met with a corresponding response from Iran and they attacked US Iraqi-based air force bases at the time, and oil was moving quite aggressively higher. And, um, Tim, this was a map I know that you, you like to talk about with some of the traders in terms of the sensitivity geographically of this area. So maybe a quick word on that and then a look at your, your annotated kind of chart and the story of 2020.

Sure, yeah. I mean, I actually used to have a printout very similar to this. I actually had about 3 maps right beside my desk, and it would have, you know, you'd have the squawk shout out a name of some completely obscure area in Saudi Arabia or Iraq or Iran, and you kind of like, you'd have to consult the map and kind of figure in, is this an important impactful area or not to supply and demand? And yeah, I mean, you know, coming into the tail end of 2019, and when we had the Saudi drone attack on the refinery facility in September. Um, that was actually kind of in sort of front point, uh, just in what it was basically one of these meaningful areas you can see in, in the Saudi Arabian region. Yeah, just, just there, uh, there was an attack there in September, and we had a record 15% gap up, um, on the open on oil on that. Obviously you've got the choke point of the Straits of Hormuz, which, you know, I mean, to an oil trader rockets fired in the Strait of Hormuz, that's an absolute dream in terms of price getting on the bid. I think we saw a bit of that, a bit of instability in that last year leading up to really what was the Soleimani murder and then these following air attacks. But yeah, you know, this is just such a key area for oil traders to monitor more so any of the facilities that are producing oil around, well, that feed in through that Strait of Hormuz choke points. So Iraq is pretty well sandwiched in there between Saudi and Iran. So they're feeling pressure. It is a proxy jump point for US military maneuvers in that area. So it is prone to attacks. Attacks from Iran. And really, you know, that this is kind of also why Syria is a bit of a battleground and why the US and Russia basically for the last 6 years have been vying for control of that Syrian region.

So just on this, on this point, Biden is obviously coming in and Biden has a very different stance on Iran perhaps a return to the nuclear agreement accord, which means a relaxation potentially of Iranian sanctions, which might lead to Iran, who is the third largest producer within OPEC, to be able to pump at levels they just haven't been able to pump at. The stats I've seen is that that could allow Iran to increase production by circa 1.5 to 2 million. Now, is that just insignificant because we're just so much more dominated by the demand recovery story. And so the Biden Iran nuclear thing layered in with the fact that is Iran really that high on the agenda for Biden politically? He's obviously got to deal with the virus and things of that nature is much more important, both medically and the economy. So does that come into this equation at all with Biden or not really?

I think, yeah, the concerns and your rhetoric there is completely valid, but I don't think that Biden really has this top of his list. I think he's quite happy with with where things are with the Chinese negotiations. I don't think he wants to come in and rock the boat hugely there.

Yeah, I'm just trying to cast my mind back to that first week of January. I thought there was a growing tension of which I think this is a great thing to understand about markets, and you guys will know this, is that markets are quite channeled actually in their macro hierarchy of what's the subject that's dominating investor sentiment at that point in time. An epidemic then happening literally a week or two after this World War III breaking out, which then created the pandemic, just absolutely took the Iranian issue or tensions in the Middle East. And we know that tensions between, say, Saudi and Iran at the core is never going to go away. But that gets compartmentalized, if you like, because there's a bigger narrative in town and that's what we focus on. So for me, it was more like they— this could have developed, I felt, at the beginning of the year, but it's just a bigger, bigger theme. Just put it onto the side and that's where it stayed. And I think that's where it will stay for the time being.

14th of November 2016. This is when Dani took office with Melania.

And we were trading back-adjusted, of course, $58.56. You can see the almighty bid that really we did take above there. And then coming into this, basically we've got this huge compression now on oil. I think from $50, essentially putting in that low from about February 2016. Um, I think this is going to be where we're going to sit largely for quite some time in 2021. I mean, yeah, we'll have some volatility coming up to the top here, you know, kind of 66s or thereabouts. Um, but then I think we're just going to put in a whole lot of trade here. Um, you know, coming back to generally the core theme for me on oil, and the one thing I did want to express in this call about oil is the demand is still there. And the recovery in terms of production level, production recovery is really in a sore place. And there are less and less companies available to produce oil at the required demand needs going into it all the way through to 2025 now. So I think it's going to be largely a sustained, steady upside on oil for some time.

So just while that's getting set up, just to recap, if you didn't see the first kind of episode in this Outlook series, which was— Piers gave a really good macro outlook of which covered a lot of these points that will be relevant for gold, which I know Will can add an incredible amount of value on the behavioral side of this as well. But the general theme then, to set the scene with gold, was that rising inflation expectations, lower real yields weaker dollar and a re-pickup in physical demand, particularly in some of the emerging markets as we go through this recovery globally, vaccine, post-COVID, has generally got the Street still fairly bullish in terms of gold, and hence some of the recovery we've seen off the lows. But put that out there as a starting point. And then I know, Will, you've got some good insights you want to share.

Yeah, I mean, it's interesting from, from the behavioral point of view, and Tim's chart annotations there. I mean, from the macro point of view, I'm certainly with Piers, as you know I've been for a while. I do think, um, the move lower since November is, is justified given Biden, given, uh, the vaccine, um, for example. But it's interesting to me that given, uh, Biden and the vaccine news, that, that actually it seems still seems pretty strong. I mean, the way I tend to trade or invest is let the market try and tell me what it wants to do. I think gold had plenty of reason to sell off in the short term below 1,700— vaccine and Biden. Really, David. I understand the longer-term inflation play for sure, but that's not going to come through until what? Next year, end of next year? I understand the other macro themes that Piers was saying, but again, that's not now. That's there in the background. As inflation always is, to be honest. Um, so the fact that there wasn't a bigger negative reaction, and it feels to me, if you look at Tim— so Tim, is this a daily candle you're looking at here, or is there actually weekly, weekly candles? Yeah, I mean, if you just have a look at the last— actually, go to daily there for me then, Tim.

Yeah, sure.

Let's see how it's looking today. But it just feels to me that it's a little bit more buoyant. I mean, there's quite a nice— if you look from the low that was hit there at 1767, which was at the start of December, so really from the start of December, but quite a nice wave pattern higher, right? You can, you can see that it just feels quite nicely supported to me, gold. So you've got the trend channel that Tim's got there, but you've also got that horizontal line at 1960. Which now, you know, took a lot of effort to get above actually. You know how gold moves, takes a lot of time. So yeah, certainly in the nearer term, um, it feels, feels buoyant, feels good. I think I agree with the fundamentals in the longer term. You know, gold is quite a strange one though. You saw on Monday with the new strain of, uh, the virus, right? And actually gold took a big push lower. Do you remember that on the short term? It went lower as soon as we got that new virus strain. So I think it's a difficult one to play on the short and medium term.

I really do.

But yeah, gold seems impressive. It seems that there's certainly plenty more reasons to have it than not. I do think predicting inflation is a really difficult thing to do. Because one of the reasons why gold moved as it did from 2009 to 2011, do you remember, we went from $600 to $2,000, was really on the expectation of loose monetary policy creating inflation. We've now got that looseness in spades. But no, I mean, talk to me, Anthony, are there signs of any inflationary pressures yet? Are they starting to sneak through? Or is it more or less likely? We should do a vote. End of 2021, will inflation be above or below 2%? What do you reckon? In the US, United States inflation.

I think it'll still be probably below.

Yeah, I think—

I mean, the— and the other thing is as well is that the Fed have obviously introduced that new average inflation targeting as a new policy directive of now. They know that— so the problem you have if you're the Federal Reserve is the difference between now and the financial crisis is that let's say the vaccine is the panacea to the virus problems, it fixes everything. The economy should go like this, and that's massively problematic from a central bank's point of view, because then you could get this like literally rampant inflation, technically speaking. So what have they done? Well, they've already adopted AIT, which is basically saying, well, look, before— we all know, having been in the market for a while, we don't need to get to 2% for people to start getting a bit edgy about higher rates. We start just coming off the floor and heading in a direction which looks like future inflation would be indicative of hitting it, the market already starts to panic. But the Fed have kind of nipped that in the bud by moving to a system whereby we'll let it run hot, we know it's going to run hot, because if the vaccine works, the economy is going to fire up pretty significantly and quickly. So that doesn't necessarily mean that that's going to necessarily result in action from the Fed. And I think a lot of that has underpinned why equities remain where they are. And you're right, I think inflation is a story for a bit later. But we did have a spook, what, 7, 8 weeks ago? The market had a little bit of a move. The 10-year moved a bit. And it was a bit like, oh, people started mentioning the 5-year breakevens. In the FT every day. So we have had— it's on people's radar, which is enough for the first step for people to be thinking, I think, about inflation. Is actually inflation— the indicators pointing to that materializing anytime soon? Well, probably not.

So I'm going to bring us back to commodities. And one of the things I wanted to look at was natural gas. So just to share a couple of concepts about natural gas that I've been tracking, some fundamentals. I'm just going to hit you with some graphs here. Essentially, the key instigator for this— I'm bullish natural gas, as are others, right? But this is the Lower 48 states' production of natural gas at the moment. And we've really been degraded down to production levels for most of 2020, given that there are less oil pumping or drilling rigs at play. So therefore, you know, gas is most of the time, and it's actually a derivative of the process of drilling for oil. You hit gas pockets, you burn it off, you can, or you can have a pure gas play rig. But the point being is that demand, or sorry, the production has been so, so scarce that it's just really starting to pick up pace with 2019 production. Okay, and then obviously, you know, we're above the 2018 and whatnot. However, the demand for this product is obviously still there, so we are still well below 2019's productivity levels. Let's give you a little look at the sort of North American breakdown of how that production is going in terms of North Continental America. And added to this picture, we have this emerging cold weather pattern that's coming in. And that, you know, the NatGas, you'd love to, love to look at the weather patterns. And it has been a pretty warm winter so far in North America. But as you can see, this is a sort of the next 15-day forecast for, for getting essentially a cold snap all across North America. So there, there's a couple of different reasons that people are buying into the long scenario in that gas. A lot of people quoting $4 by the springtime. I have looked at the prices on the September contracts, September 2021, and again, we are quite cheap, I would say, in that gas. So I think we're starting to see sort of a bottoming out here on this. I've been long this thing pretty much over the last couple of days trying to, trying to work into something. I'm thinking about going to execute in the September contract so I don't have to keep rolling futures contracts. I'm thinking about getting long call options on some gas ETFs, on some gas companies. So that's really something I wanted to cover, and I'm going to post some links to, um, some of these stories as well in the room as we finish up. But you just wanted to get that covered.

Whenever I get questioned about commodities, you are in a sense— when you look at, on my side, the fundamentals, obviously when it comes to, say, supply dynamics, you talk about particularly metals. So if we start going into, say, industrial base metals, iron, copper, tin, these sorts of things, or either precious metals that I guess we don't typically look at. So things like palladium, platinum, and so on. Um, I mean, I've always said to people that of course you can trade those markets technically. They will respond much in similar ways to other products. And if you look at silver, I remember, was it 6 months ago, silver was like gold on steroids when it was moving. Yeah. So it's very behavioral, very technical. And the fundamentals were almost diminished because it was all moving on the similar narrative at the time. So if you were ever going to look at trading, let's say, a new commodity product, would you spend a period of due diligence going into— I know, obviously, you feel comfortable in the natural gas energy space. And my assumption is that's born out of your— I mean, you lived in Texas. You know the industry well. And that equips you, I guess, to have base competency and connections and contacts. I mean, is that— how would you go about with these guys if they wanted to explore other products? Because obviously there's hundreds in commodities. Sure. Yeah.

Um, I mean, look, there's, there's like 100 different grades of oil you can trade as well, you know, but a lot of people don't really realize. Um, but yeah, to be honest, you don't need to be that saturated in all of the fundamentals on these particular products And you do need to be aware that there are sort of pockets of communities around the internet that you can find, and on Twitter and research notes that you can find, where you'll actually stumble upon a little hive of people that actually are all over a certain commodity like tin, for example. I've never traded tin, but I do know that there are places where you can find a whole load of tin traders, and there is, there is a market there. There are pit hours for that. And once, you know, that— I think to answer the question, it's roped in there with, you know, how do you specialize in a product? And, you know, knowing that there are fundamental key data events there, there is seasonality to gold, for example, you know, Indian wedding gold buying season, September, you know, you kind of need to be aware of some of these, these timings and, you know, any relevant data on certain products. So it's kind of hand in hand with changing to specializing in any product.

But, um, actually, on that, that point of seasonal demand, I thought it was quite interesting is that India, for example, no one really talks about COVID in India because we live in England or you live in Ireland. And so what, what point is it of a media news agency in our world talking about Indian COVID cases, but obviously these are, these types of areas, these underdeveloped countries have been impacted greatly by COVID. And one of the things that I was reading was about India, which obviously from a physical point of view, along with China, but more so India, a lot of, a lot of weddings have actually been delayed or put off. For obvious reasons. The obvious reasons being that, I mean, you can't social gather, um, people don't want to put people at risk. There's, you know, there's lockdowns, there's restrictions, there's people losing their jobs, there's, there's all types of reasons to do that. What that does mean is that overall, I saw the World Gold Council stat that gold demand dropped 10% year over year in the first 3 quarters of the year. So physical buying of gold is down 10%. Now, that's the first 3 quarters. Q4 so far is showing some signs of recovery, as what we've seen in other markets, like in oil, for example, kind of post-vaccine Pfizer, 9th, 10th of November was the trigger, almost the catalyst, and we started to move up. So a couple of interesting things would be, is there an argument as well as all the other stuff we talked about, we will, about gold. Yeah, there's just a physical pent-up demand that needs to play out as a story here in '21, potentially in the second half.

Well, you know, there's a couple of things that are great about this conversation here. You mentioned India and China, but for now, let's just look at India. So when we went negative on oil, um, And we stayed low on oil for like 30s, low 40s. Who, who was buying all of that oil? Where was the oil being soaked up? It was India and it was China. China were building storage, on-land storage facilities as fast as they could. And they just had this queue of ships, tank— oil tankers queuing up in the ports. Waiting to load it in into these facilities that are literally just being built the day before, literally. Same in India. They were just soaking up all of the cheap oil. And so again, in a commodities market, commodities are supply and demand price-based. And there's nothing like cheaper prices to get people out there buying it, essentially. Have a look at the video footage of Black Monday and sales in the US, you know, people punching everybody to try and get that LCD TV or whatever for, you know, $200 cheaper. Essentially, there's nothing like lower prices on any commodity to attract buying.

Yeah, that certainly plays out then interesting with China economic data of recent months has really been quite impressive. As much as there's a hesitancy of market participants to really buy into the quality of the data which they receive, the net result is, is that, you know, if China has secured a lot of this base component that's key to manufacturing activity, essentially, then that's got to be a positive story, not only for themselves, but for the global picture. If they can perform, I guess the counterargument to this is it's all well and good if China are in a good spot from a cost perspective to operate efficiently. But what if their customers aren't ready? And the customers being Mr. USA and Mr. Europe and, and his friends. Just reverting back then to conclude, I mean, is it a fair assessment to say then that throughout the conversations we've had over the last 3 days, talking forex, talking commodities now, talking equities yesterday, core, core to a lot of what we've spoken about coming to fruition is really dependent on the vaccine and the timeliness of that. And so That in itself, I think from a top-level macro perspective, is, is really where you guys need to have your mindset going further into the beginning of next year. Particularly, I think the first 3 to 6 months is going to be key. And I say that because COVID cases are going through a renewed acceleration phase in the places that matter for financial markets right now. Which is developed world economies. And that's going to be met forcefully with government renewed lockdowns. And that is going to have economic implications. So the virus is critical more now than the vaccine. I mean, it's critical more so now than ever. We are in the first steps of that. There's other companies that need to follow suit still to go through the kind of the end part of actually getting to manufacturing and distribution stage. The distribution barrier is still a hurdle to be mounted at this point, and so there are certainly risks, I think. But just again reiterating, I think we have a shared view of what kind of Piers was saying on the first day, which is that the base case scenario is that the variant that we're seeing in the virus is not detrimental enough to deviate from that course of expectation that 2021, all things considered, should be bullish for stocks, should be bullish for commodities, and that's supported by the prevailing dollar weakness as well in that sense.

Absolutely. I think, yeah, to round this off, I think the greatest trades that I've enjoyed myself is the deviation from the base case.

Here's the base case: the new variation, the new variant of COVID is going to be contained by all of the vaccines that we have. January 10th comes out, the new variant is totally immune to the vaccines. You're going to see March Part 2, March 2020 Part 2, I think, under that circumstance. Albeit it will be contained to the downside because they will be able to deploy a vaccine for that new variant a lot quicker, right? But you will see a huge amount of volatility. You're going to see dollar back up, um, you know, and, and essentially for me, 2021 is, is a dollar story and it's a vaccine story, um, and they're the two key things that I'm going to be looking at to drive most, if not all, of my investment trading decisions.