Backwardation is the term used to describe a commodity whose future price is lower than todays while Contango is the term used to describe the inverse condition. Obviously there are a number of moving parts which determine how markets are trading months and years ahead but supply & demand are front and centre in the equation with the latter being largely driven by future economic forecasts.
Interestingly, at the moment prominent commodities such as crude oil and iron ore are not believers in their short-term price squeezes with both trading in clear backwardation which undoubtedly contributes to why both respective sectors are struggling to rally to fresh highs with the ASX although the underperformance is far more exaggerated in the Energy Sector. At MM we feel this lack of confidence towards economic expansion in the months / years ahead is creating opportunities in a number of quality names which we believe are cheap compared to the market e.g. we bought Santos (STO) and OZ Minerals (OZL) last week.
MM remains committed to the “reflation trade” over the coming year (s) which points to both higher commodity prices and a Resources Sector i.e. we believe the current slump in economic confidence, illustrated by bond yields, is coming to its nadir.
MM is looking to increase our exposure to the Oil and Resources
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