A Fundamental Approach to Commodities ft. Ricardo Leiman & Pedro Marion

´[00:00:00] Ricardo

I think that there’s a disconnect between what politicians believe and what the general public is prepared to pay. I think that’s why we’re seeing that the penetration of EVs is starting to slow down because people don’t want to pay a huge premium for electric vehicles. They’re not sure that they have the money to buy those cars. So I think that, yeah, oil is very alive and will be kicking for the foreseeable future.

[00:00:38] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:33] Niels

Welcome to another episode in the Open Interest series on Top Traders Unplugged hosted by Moritz Seibert. In life, as well as in trading, maintaining a spirit of curiosity and open-mindedness is key, and this is precisely what the Open Interest series is all about. Join Moritz as he engages in candid conversations with seasoned professionals from around the globe to uncover their insights, successes, and failures, offering you a unique perspective on the investment landscape. So with no further ado, please enjoy the conversation.

[00:02:09] Moritz

Hello, listeners. It’s Moritz here, and I’d like to welcome you to episode number six of the Open Interest series on Top Traders Unplugged. I love finding these traders and fund managers that most investors probably aren’t aware of or haven’t heard about, maybe because these traders are somewhat under the radar or because they operate in a niche of the hedge fund space where the big money doesn’t or cannot go. And I find this really motivating.

So today, I’ll be speaking with Ricardo Leiman and Pedro Marion from KLI Asset Management, which is a UK-based commodities-focused investment fund. KLI got started in 2018 and today manages about $400 million, a big chunk of which is internal capital by the way, and their trading edge is rooted in deep fundamental analysis of commodity markets and their extensive contacts to merchants and other participants in the physical space.

I always find it very interesting when traders use their connections in the physical markets and use that information to trade, which is why I thought that I should have a chat with KLI and take a bit of a deeper dive into what it is that they do. So, without any further delay, Ricardo and Pedro, welcome to Open Interest.

[00:03:24] Ricardo

Thank you.

[00:03:26] Pedro

Hi, Moritz. Thank you.

[00:03:28] Moritz

You’re more than welcome. Ricardo, you have a really interesting background. Let’s start there. You were the CIO and COO globally at Louis Dreyfus where you worked from the late 1980s to the early 2000s. And then you were the CEO at Noble Group based in Hong Kong, I think, until 2011.

Maybe some of the listeners remember that Noble Group had a bit of a, shall we say, hiccup, or maybe the technical term is imploded, because they cooked the books in 2015, which was long after you were no longer there, so it doesn’t have anything to do with that. But that kind of like comes to mind. But that aside, tell us what got you into commodities trading all the way to KLI Asset Management.

[00:04:12] Ricardo

I think important also to mention that me and Pedro worked together at a company called ECTP. We started there. I founded the company, raised equity capital from a Brazilian group called BTG, and we built a global commodity business from scratch, which was a very exciting proposition. I did that from 2012 to 2018. After leaving, we started KLI.

I was at the time living in Brazil, which was a closed economy. Actually, one of the only vehicles of being close to the international market or the world when globalization was not really an item was the commodities market, and that’s what attracted me to start my career as a trainee at Louis Dreyfus back in Brazil in 1986.

[00:05:03] Moritz

Wow, a long time ago, and I think you stayed there for what? Almost 20 years all the time in Brazil?

[00:05:09] Ricardo

Actually, no. I worked on and off for Dreyfus. I worked there twice. But the second time I worked there was in London where I was working close to the CEO of the company when I was at the global headquarters of Dreyfus at the time.

[00:05:26] Moritz

And then you moved to Noble Group in Hong Kong I think until 2011. All right.

And you, Pedro, Ricardo just mentioned you started a company together in did you say 2014 or something like that? But what did you do before. Did you know Ricardo before then and did you trade commodities prior to that?

[00:05:46] Pedro

I started my career in 2004 at Goldman Sachs in a bank, so quite a different path to Ricardo. But after working quite a few years in banks, I didn’t know Ricardo, but when we met, we clicked and I decided to join this project at BTG or ECTP. And yeah, that was a lot of fun to be honest. We had some good years.

[00:06:16] Moritz

Great. Fantastic. So Ricardo, to get into it, you are the CEO of KLI Asset Management based in the UK. If somebody approached you on the sideway and said, hey, what does KLI do in a nutshell, what would you say? What are you guys focused on? What’s your edge?

[00:06:34] Ricardo

Our edge is something that is a bit unloved or neglected by the market, but that’s how we started our career, which is basically as you mentioned fundamental commodity analysis. That’s one of our edges. I’ve worked more than 30 years in the physical commodity business across the spectrum running plants, sugar mills, iron ore mines, coal mines. That gives us really an edge in understanding all the price points and the elasticity of demand and supply in these commodities.

Two others edges that I would mention that we have. One is that we’re not short-term traders. We are really focusing on the fundamentals and where we can get big bang for our buck. That’s basically two elements. The third one is that we run a diversified portfolio, so we never have more than 35% concentration in one commodity. So that’s something that gives us also an ability to hold positions when the market goes against us from a flow basis.

We’re really focusing on things that are more medium to long-term focused. So I’d say that we’re more like an investor in the commodity spectrum, being long or short, waiting for fundamentals to take place, then short-term traders trying to make a quick buck in and out of positions.

[00:07:57] Moritz

You just mentioned, Ricardo, sugar mills, the softs. Is there any specific focus that you have within the commodity spectrum like more of the softs and the grains or is it more of the energies or is it really just everything across the board?

[00:08:11] Ricardo

No, we don’t trade everything. We trade in the bulk commodities, iron ore, coal. We’re trading base metals, the main base metals like copper, nickel, aluminum. In energy, we focus on crude oil, natural gas, emissions, so things that are quite liquid and we can do the analysis and operate as a portfolio as I discussed with you.

One thing that is very important for us is liquidity so we can be in and out or stop out of positions when we want within 24 hours.

[00:08:46] Moritz

One of the markets that is really on fire right now and moving a lot is cocoa. So is cocoa a liquid enough market for you to trade? What do you make of the current situation?

[00:08:56] Ricardo

No, we don’t actually trade cocoa. We follow the market. We think that cocoa is a commodity that is dependent on two countries that actually manage 70% of the global supply. We think that doesn’t fit really in our category of risk diversification because it has a lot of political risks associated to it. But we are following the market. We’re talking to some people that are, let’s say, the last experts on the cocoa, and there are not many of those around.

But that’s the kind of interesting market that we look at to replicate in different commodities. So for instance, when you look at some of the fundamental views that we have that we can make a big bang for the buck, it’s the kind of cocoa type of price performance which is a neglected commodity for a few years. Everybody’s uninterested, there’s a supply problem, difficult in terms of switching demand to other products, and then it goes into a parabolic move.

It could be up or down. That’s kind of where we focus on, and cocoa is a good example of what we’re looking for in terms of market opportunities.

[00:10:12] Moritz

Yeah, it definitely did go parabolic trading north of 5000 I think, or 5500 even today, so it’s still going. It’s still going. Who knows? Nobody knows what the limits are, right? There’s definitely no limit up, no limit down on that market, but limits in terms of how far and how high that price can go is anybody’s guess really, as far as I’m concerned.

[00:10:37] Ricardo

Yeah, that’s the interesting thing about commodities. Nothing happens for a medium term, but suddenly, everything happens and the market is really not prepared or paying attention. That’s the nature of commodities. It’s different than equities or bonds. Things just happen all at once and then things can go parabolic as you see.

[00:11:02] Moritz

Yes. It’s not a financial market, it’s a real asset market. That’s the key difference.

So, Pedro, Ricardo mentioned the fundamental analysis and your networks into the physical trading arena. How can we envision that? What does that mean? Are you on the phone with traders and margins speaking to them about whatever, like stock inventory, these types of things?

And why do you think would they actually give you the correct information and not feed you something that is maybe an incorrect piece of news to support their own positions?

[00:11:40] Pedro

Commodities traders have a tendency to all have the same view all together at the same time, so I think it’s important to come up with your own view rather than trade a crowded view. But having said that, sometimes you do need to call on past colleagues or friends you have in the industry who have a deeper understanding of the physical market at that given point to understand exactly if your thesis is correct and to do any further work.

Why would they tell you the truth and not just talk their books, etc.? I think really, after so many years in the markets, you know who are the people you can rely on, who are in effect the good guys, and who are the guys that you should not be spending too much time with? So, I think that’s just a matter of knowing the right people and having spent enough time with them.

[00:12:43] Moritz

Any other ways to get to the information that you require or like? Weather reports, USDA reports, these types of things, is that stuff that you’re paying attention to?

[00:12:56] Pedro

I would say, on top of our internal research, we have access to many research from external providers. I think you marry the two and you try to get a deep fundamental understanding of the market. That will require sometimes like you said to have a few conversations with some ex-colleagues who are in a particular field to understand exactly what’s going on.

Just this morning, we were talking to a past colleague of ours to understand quite a swift move in some spreads in aluminum. So that’s one thing we’re looking at this moment. So, important to have those relationships.

[00:13:39] Moritz

Right. Ricardo, I think in our prep call, if I remember that correctly, you mentioned that in addition to the futures markets, and I guess what we’ve spoken about so far is probably linked to you trading futures, but you also trade commodity equities and I just found that very interesting. So A, why do you do that and what would you say is your specific edge there? And what gets you interested in equities positioning?

[00:14:06] Ricardo

Yeah, this is an interesting question, Moritz. Basically, we have been doing this for more than 15 years. We started having an adaptation of some equity traders that were in utilities, back in my days at Noble since 2008 actually, that started to develop this approach to equities in commodities.

Basically, why we trade that because sometimes, when we have a view of the commodities, equities will work as an option in terms of the leverage that you can get to the commodity price. So you can get sometimes a dividend paid so you can carry the position with a positive carry. At the same time, if you’re right on the commodity direction, you get an exponential move up in the P&L.

We choose very well companies that don’t have a lot of debt and are market leaders or have an edge and low-cost producers so that if we’re wrong, we don’t get completely wiped out. We also use a diversified portfolio to our approach. Equities in our book is about 20%, or maximum 25% of our book, and we really like it and have a very good track record trading these commodity equities.

[00:15:25] Moritz

Kind of like the same thinking as say an investor that’s interested in a long gold position saying I’m going to be buying the gold miners or the gold juniors because I’ll get more bang for the buck if bullion actually does make a breakout to the top side. That’s the idea I guess what you’re saying.

[00:15:42] Ricardo

It’s not dissimilar, but at the same time, as I said, it’s important to understand each company and it’s important to understand the capital structure of each company so that you can not only get the upside, but if you’re wrong, in terms of the commodity price direction, you don’t get wiped out.

[00:16:00] Moritz

Right. Would you sometimes also become interested in say a relative value play? I’m just using a simple example, say BP or Shell has underperformed the price of Brent. You could say, okay, it’s time to buy BP and Shell and sell Brent against that would be like relative value commodity equities play. Would that ever cross your mind or is it like, no, you guys are too focused on having longer-term directional plays?

[00:16:28] Ricardo

Yeah, I would say that we’re more long-term directional players on that. There are some people that are specializing trading BHP versus Rio for 4% or 5%, but we’re mostly focused on big moves. At the same time, there is a very lag time sometimes in the equities to commodity prices or vice versa.

Many years ago, in early 2016, you had the crude price collapse but the equity of Shell the remaining pretty much unchanged. So we sometimes prefer to trade just either the underlying or the equity, but we’ll never trade the equity versus the underlying. That’s very dangerous we think.

[00:17:15] Moritz

Pedro, when Ricardo or when you say long-term, what does long-term mean statistically, because it’s subjective? What may be long-term to you may be actually short-term for somebody else. What’s the hold period that you have on average in a position?

[00:17:31] Pedro

That’s a good question. And sometimes, long term is longer than we wish for. But anything from three months.I think on average, probably, we’re looking at 6 to 12 months for us is long term. So when you look at commodities like we’ve been discussing, we look at fundamentals. Fundamentals don’t realign overnight or very rarely do.

So when you go into a trade because there’s a misalignment in the fundamentals, in the supply-demand of the markets, it usually takes quite a bit of time for the market to come back to reality. And because commodities are like you said tangible assets, the fundamentals will always win. So it’s just a question of timing it right and having the right position.

One thing that we try to get to the right mix is the leverage because if you have too much leverage, you can’t hold a position long enough. You have too low leverage, then you don’t have the right size position to make the money that you should have made. So given the horizon of our trades is 9 months, 12 months, sometimes 15 months, you really need to look at that leverage properly.

[00:18:45] Ricardo

Yeah, I think there is another element also like we’ve observed in the past year in terms of base metals. So have you seen a real depletion of stocks of stuff like aluminum or copper, when we’re at record low levels of stock-to-usage ratio in terms of days per week from a consumer perspective.

Another point to Pedro’s issue is that sometimes there’s a massive destocking in the supply chain which really postpones fundamental moves. So we started with two weeks, then we go to eight days. And now, in terms of copper, we’re at three days and soon we’re going to be at one day or something like that. But that’s a massive LME in terms of the stock in the supply chain.

[00:19:41] Moritz

If that is true, why, in anticipation of that, isn’t copper skyrocketing would you say?

[00:19:48] Ricardo

I think that’s a good question. Sometimes we’re also scratching our heads. But I think that the issue of increasing interest rates made a lot of consumers really destock. We see massive destocking in Europe, less so in the US, and there are actually no stocks in China, as we said.

Funny enough, we had, as I said, the prices of copper and aluminum going down with a massive drawdown in global inventories, which is pretty difficult to put both together. But I think that nowadays, there is not so many fundamental traders left. You have more consumer users and a lot of people focused on short-term moves trading ranges, and I think it’s going to be something similar like cocoa. One day, something’s going to happen and it’s going to just make a big move.

[00:20:52] Moritz

So copper, I’m just looking at it because I always find it interesting to maybe stay with one idea and take it a bit further. So cocoa is in contango right now. I presume given what you’ve just described, you might be interested in building up a long position expecting copper to go high. Let’s just say that’s true.

Would something like the shape of the curve and there being a steep contango make you shy away from that and say, no, I’d be overpaying for a long-dated futures contract and therefore I’m not doing that?

[00:21:23] Ricardo

Yeah, definitely so. We try to avoid being short commodities that are in backwardation and being long the ones that have a very high contango. But the specific case of copper, there’s not a very big contango.

[00:21:39] Moritz

Yeah, it’s not very high. It’s like, whatever, 384 front month to 386 in July, so whatever.

[00:21:47] Ricardo

The cost of carrying the position is not very high. Of course, there is an opportunity cost which is cash. But we deem that it’s not a prohibitive cost to carry.

[00:22:00] Moritz

Got it. Do you sometimes use options for your positions? Like you could be thinking about buying a long-dated call on copper or a call spread or selling a put. Is that something that plays a role in your book?

[00:22:13] Ricardo

Yeah, we avoid the selling options. But when we have a view that something’s going to move quickly and brutally, we’ll operate some options. But nowadays, as I discussed, the timing of commodities, because of the drawdown of the supply chain, it becomes more unpredictable. So we trade as much, I’d say as 5% of the book. I would say that another 5% is relative value and I would say that 90% is with directional. We’re directional guys primarily.

[00:22:50] Moritz

One of the things, I’ve been looking forward to the question, it came up during our prep call, is your use of bespoke CTA trend following models and using trend following models to forecast flows. What exactly you do with that information we didn’t get into. I was kind of like sparing that discussion for right now live.

Are you trading against that anticipated flow, ahead of that anticipated flow? How much edge is there and the exploitation of a CTA trend following model for what it is that you guys do?

[00:23:26] Ricardo

Basically, we have two ways of analyzing CTAs, and we do both of them. We look at the short-term CTAs which are basically trading moving averages, and they’re simple to track. They’re very fast and very active. There are other types of CTAs which are more momentum or those that look at the shapes of the curve, etc. Those are more like longer-term CTAs in terms of when they buy and sell.

It is very important nowadays for any trader to follow what CTAs are doing. But we don’t trade against them or with them. We basically use the information to time our positions when we get in or out. So if CTAs are long something, it’s something that we analyze with our fundamentals. We look at shortening, but we try to avoid something in the middle.

But we have a quite sophisticated in-house model that we developed in terms of the longer-term CTAs which are more complex.

[00:24:36] Moritz

Cool. Well, I guess when I run trend following models on these commodities, these models actually make money. The genesis of my question is, trading exactly against them in the opposite will probably put you into a negative expectation game, unless you have a way of providing liquidity and that type of stuff where you may have an edge. But I get what you’re saying.

[00:25:02] Ricardo

We actually did an analysis in terms of if you go against CTAs, if you make money or lose money, and basically, it was inconclusive. The fundamentals in the end are what really drive the commodities.

[00:25:24] Moritz

Let’s bring it back into maybe some of the interesting themes that go on in the world right now. Economic slowdown, maybe, maybe not, no landing, soft landing, bird landing, who knows? I actually have no opinion about it; Chinese growth slowdown. What is it that you currently look at that is particularly interesting?

[00:25:49] Ricardo

It’s interesting that despite the slowdown in European economic activity and also depletion of corporate stocks in the US and the crisis that is perceived about China, corporate demand in the year, that passed in 2023, went up substantially, and so did aluminum.

With European demand went down 10%, global aluminum demand went up a couple of percent because of China. So actually, China has been the one country that has been pulling demand into these green metals, if you call them transitional metals. So it’s interesting that people are so negative about China and the world.

I would say that China, despite the consumers being very negative, the underlying demand has been very high for these base metals, and continues this year. So there is something fundamentally changing in the Chinese economy, which is increased use of these transitional metals.

In Europe and the US, as I said, demand has been going down primarily because of destocking. So we think that people can the destock up to a certain moment. When interest rates start to go down and the economic cycle picks up, I think that you will see a pickup in demand in these countries as well.

Basically, the industrial cycle is an 18-month cycle, and probably we’re reaching the bottom of the down cycle globally in my opinion.

[00:27:28] Moritz

So you think, or Pedro maybe you want to chime in, there is no hard landing or recession. We’ll probably, did I get that right, glide out of maybe a little bit of a bottom that we have now and emerge into a new cycle of growth?

[00:27:44] Pedro

Yes, I think that’s our view. Even last year, I think there was a lot of negative talk in the US about recession. What was interesting last year is even though there was no recession, just the idea and the thought of having a recession in the US also increased a lot of this talking that Ricardo mentioned.

So just the all the negativity, in the end, even though you didn’t have the recession, you had all the effects of a recession in terms of destocking. Going forward this year, I completely agree with Ricardo. I think not only you’ll have the normal demand pick up, but also, if the rates do go down, you may also have some restocking going on. So we’re quite positive on global growth.

[00:28:35] Moritz

Ricardo, I think you mentioned earlier in the conversation the bulk commodities. Let’s tie this into what you’ve named the transition or the transition probably to a greener form of energy or the green transition, ESG-focused green transition. How does that impact the coal markets going forward in your view? Because we’ve seen them actually rise in price. Germany has never burned as much coal as they did in the past couple of months. What’s your view there?

[00:29:03] Ricardo

Well, my personal view is that Asia is burning coal like there’s no tomorrow. You have increasing demand in China, increasing demand in India, and continuous building of coal-burning plants across Asia. So despite the West declining in terms of coal demand, we continue to see that Asia is picking up. So I don’t think coal is going to be dead like crude oil for the foreseeable future. But Pedro is our expert in coal so maybe he is best to comment on that.

[00:29:41] Moritz

We’ll go to Pedro but save the idea of crude oil is dead.

So Pedro, on coal, I think coal prices have been going down. I think when I last looked at Rotterdam, it’s kind of like a one-way street to the hike down, down, down. Yet at the same time, Ricardo is saying the world is burning more of it. How do you tie it up?

[00:30:00] Pedro

I think you’ve got to look at we’re just coming out of a really warm winter, so that would have affected a lot of the heating demand. Ricardo is right. The burn has been incredibly high in Asia, but so has the supply. So production has been good. I think the one issue with the coal market, and it’s one of the reasons we trade less and less of it, is the liquidity of it is completely gone.

I don’t know if you’ve followed it, but coal is one of those markets that I guess with all the negative publicity, all the banks have had to pull out of it. The liquidity in coal has really dropped down.

[00:30:45] Moritz

You can still trade it though through OTC brokers, specialist brokers?

[00:30:49] Pedro

No, you can still trade it. It’s traded on exchange. Like I said, the liquidity isn’t great, but you can trade it. The market that came alive, I guess, at the same time as coal, went down and that was the emissions markets. I’m sure you follow the EUA price action and all that, and I think that’s a really interesting market which for me is more interesting than coal these days.

[00:31:13] Moritz

Sure, with all the linkages that you have into the power markets or coal markets, gas markets, the weather markets. So yeah, okay. Ricardo, we’ll come back to the WTI is dead or oil is dead idea, but now that Petro has mentioned the EUAs, that is a very interesting market not only from a political or green transition perspective but also from the point of view that only a couple of months ago, it looked like you were finally going to go through 100 euros per ton, and now we’re trading close to 50.

So what has happened? Is the bottom falling out? It seems like with the economy being relatively weak, the weather being very mild, gas prices way down, nobody really needs these EUAs anymore.

[00:31:57] Pedro

I think you’ve answered the question yourself, Moritz. I think the warm winter hasn’t helped. The industrial demand in Europe has been poor. There was a short covering at the end of last year from discretionary money which all came back in January. There’s been a lot of effect from negative gamma as well, down these levels here around 50, 55 euros. So there is a lot of selling.

And on the other side, if you look at the real demand, it’s not there really. Compliance buyers are taking their time in fulfilling their needs. But again, it depends where your horizon is. If you’re looking at say a two, three-month horizon, I cannot tell you where emissions will be. If you have something a little bit longer than that, maybe 9 months or 15 months ahead, I think it’s getting to a point where it’s getting quite compelling to be long.

Emissions is a market that we traded proactively in 2021. It was very publicized. There was this really good rally which we participated in. And then the following two years, we didn’t touch it. We didn’t see a story. We saw a lot of sideways. It was volatile, but we didn’t see a fundamental story is strong enough for us to deploy. We’re now, two years later, starting to deploy in the space again. So I think the next few months are going to be interesting for EUAs.

[00:33:29] Moritz

This market also has political backing. I guess the European Union and people there don’t want that market to die. They want the market to thrive and ideally to go higher. So say you have this, and I think that’s what you’re saying, you have this longer-term positive view on EUAs. Would you now just not be trading the market, or would you be kind of like long?

Say you had a long position which you initiated whatever, like at 80, it’s like, well, I’m fundamentally long, I’d be happy to take it down to 50 or 40 or 35 and just stick with it and wait for it to go higher, or is there a point where it’s like, oh, no, we’re stopping that out, we’re going to be long another day?

[00:34:09] Pedro

Luckily for us, we didn’t get long at 80. It goes back to what Ricardo started the podcast with. It goes back to our diversification. Because if we were an emissions fund just trading emissions and you get long at 80 and it’s trading at 50, it’s a tricky sell to investors. Again, if you have your own money deployed, it’s a tricky one to go with. If you trade it as part of a bigger portfolio, hopefully, you’re going to get a few trades right.

It gives you that staying power and that luxury of deciding what you want to do with emissions. Do we believe it’s strong enough that we’re going to keep it, or you know what, the fundamentals have changed, and we don’t like it anymore, let’s kick it out? For us, as a long-term trade, it’s one of the ones that we really like it.

[00:34:39] Moritz

When you do these fundamental analyses of these markets and you come to the conclusion that EUAs for instance are a buy, do you also formulate a price target? That could also be the outcome of the fundamental analysis to say, oh, yes, it’s trading at whatever, 55 or 52 euros per ton now, but really, our fundamental model says, by the end of, say, 2025, it should be trading at 120. Is that an outcome that your models produce or which you formulate?

[00:35:29] Pedro

It’s difficult to come with a definite price like this because the demand obviously comes from all the power stations in Europe. So, we know where the demand is coming from. The supply is different to other commodities in that the supply and the equation that’s given to you, it’s a political decision. So that can change. That can vary.

As far as we see it right now, we think that emissions could easily double in price from today’s numbers. But if we got there, it depends on when you get there. One thing which is really difficult to do in commodities these days is to time when the trade happens because we see a lot more of the computers trading it and there’s a lot less people looking at fundamentals like we do, certainly if you’re compare it to 20 years ago.

But if we do get to that level of 105 or 110, it really depends on when you get there and how you get there. Is it because of more supply response from the politicians? Is it because there’s more burn because the industry is doing really well or really cold winters, etc.? So you really have to assess how you get to that number.

[00:36:42] Moritz

Before we come to the oil markets and maybe gas, do you also trade the power markets which have this kind of like very close link to EUAs and gas?

[00:36:51] Pedro

We do trade it from time to time. At the moment, we don’t have a position in the power markets. If we do trade it, we’ll trade the German power.

[00:37:01] Moritz

Phelix.

[00:37:02] Pedro

Yeah, which is the liquid one.

[00:37:05] Moritz

Right. Okay, Ricardo, so oil is dead is I think what you said? Why do you say that?

[00:37:13] Ricardo

I said that that’s what the market perceives that oil is finished. But I think that oil is very alive, and it will continue to be alive for the foreseeable future to be honest. So I’m not one of these proponents that believes that gas and oil will disappear from the energy matrix, to the contrary. I think that probably the green transition will take a lot longer than the politicians have estimated.

I think one of the key issues is that nobody ever asked the consumer if they’re prepared to pay for this. You’re already seeing this in France when energy prices went up and they increased taxes what the results are. You’ve seen also recently in Europe when the German farmer’s diesel subsidy was cut, what was the effect.

So I think that there’s a disconnect between what politicians believe and the general public is prepared to pay. And I think that’s why we’re seeing that penetration of EVs is starting to slow down because people don’t want to pay a huge premium for electric vehicles. They’re not sure that they have the money to buy those cars. So I think that, yeah, oil is very alive and will be kicking for the foreseeable future.

[00:38:40] Moritz

Yeah, I think these EV prices are falling across the board, at least that’s what the newspapers report over here. China is building a lot of them. Maybe all of the EVs are going to be coming out of China at some point. They’re even getting their own ships to ship them over to Europe.

Personally, I’d agree with you and your views on gas and WTI and the transition away from the fossil fuel matrix taking way longer than people expect today. Interestingly, on natural gas, because that seems to be a market that is kind of like in the transition mode to global integration with LNG like it always used to be. You have Henry Hub and you have TTF. You have UK gas and different delivery points.

It’s a gas molecule, but it’s very difficult for that gas molecule to travel from the United States to Europe. But that has now or is changing with LNG. Do you think there’s an interesting or attractive trade there for you to play?

[00:39:42] Ricardo

Yeah. Listen, some people play the arb between the Henry Hub and European gas. There will be an arb between Europe and Asia and so forth. We are not relative value trades. This is a very relative value trade. We prefer to be the longer gas, short gas in Europe or in the US and not touch Asia because the market is much less liquid there.

But as you rightly described, as you have more liquification capacity being built in the US and Europe are likely to buy gas from Russia in the foreseeable future. I think it’s definitely becoming an integrated global market and there’s going to be lots of arbitrage to play between freight US and Europe primarily. Definitely so.

[00:40:32] Moritz

You trade the freight markets as well?

[00:40:35] Ricardo

We trade bulk, but we don’t trade basically the liquid market or other markets. One of the constraints that we see is liquidity. It’s not great liquidity primarily in bulk as we see. So we trade it on occasions, but it’s a very small part of our portfolio when it is.

[00:40:55] Moritz

Maybe Pedro as a final idea probably the grain markets because we didn’t speak about them yet. When you look at wheat, corn, whatever, Kansas Wheat, Chicago Wheat, Spring Wheat, Matif Wheat, all of these are headed south. What’s your view on the grains markets?

[00:41:16] Pedro

Ricardo is really the expert here, but our view has been we’ve been negative on corn and soybean for a few months now. The position isn’t particularly big. This is the market we played and we played in the long term. Again, these grain markets are a shorter cycle than all the other stuff that we trade, obviously because of the weather components.

But yes, we’ve been short soybean. We had a double in palm oil. We do play the Ags as well.

[00:41:44] Ricardo

Yeah, if you look at a new crop supply and demand, it looks pretty much like a train wreck if we get those crops planted. I think that if the weather is good, we will probably test cost of production.

There is another element that people are not really pricing or even thinking about. If Trump starts again with trade wars and we have the same element of China retaliation, that’s going to impact a lot of Chicago futures as it has back in 2019, as I recall. So that’s something that the work is not really pricing very much, but it’s not a complete impossibility. But as I said, with good weather, I think the market is going to touch production costs.

[00:42:37] Moritz

All right. So that is probably then more a thing for 2025 with Trump and new tariffs. But I think what you’re suggesting is that there could be an up move in Chicago Wheat, Kansas Wheat, etc., because it’s no longer exported to other parts of the world, but it needs to be staying within the USA.

[00:42:55] Ricardo

Remember when tariffs were imposed on China, China retaliated, and they basically bought soybeans and corn from Brazil and Argentina and avoided the US because they put tariffs themselves. So that impacts the Chicago futures in a very negative way definitely. But I don’t think it’s 2025. No, I think it’s the crop that is going to be planted now which is going to be harvested in September-October. So, it will be this year’s futures. Not old crop is new crop, but new crop 2024.

[00:43:31] Moritz

Cool. Well, very interesting. Anything else you want to bring up that’s high in your mind?

[00:43:38] Ricardo

Listen, I think there’s lots of interesting things happening in coffee, sugar, etc. We have some in our portfolio. There was a massive liquidation in sugar, but we don’t think that the S and D has changed that much. At the same time, we’re going to have a very big coffee crop in Brazil.

Prices are quite high supported a lot by a shortage in Robusta. We think that can change as well. There are issues in the delivery market in coffee, but we think that there’s going to be a lot of volatility in these two commodities, which makes soft commodities very interesting.

[00:44:13] Moritz

So coffee, you’re more bearish and sugar, did you say you probably have a more bullish view on sugar?

[00:44:17] Ricardo

Yeah, we do.

[00:44:19] Moritz

All right. Great. Guys, I really enjoyed that a lot. Thanks very much for coming on and joining me today on the podcast. I found it really fascinating and I hope that everyone listening will have found it interesting too. As usual, you can find Ricardo’s and Pedro’s contact and social media information in the show notes. Should you have any questions, please send an email to info@toptradersunplugged.com. We will pick it up and respond. So thanks so much for listening. Until next time on Open Interest.

[00:44:52] Ending

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