Q: What do you expect to happen next?
A: It seems unlikely (the production) agreement can persist indefinitely. So many countries need prices to go higher. In terms of the balance between upside and downside risk, we think most of the risks fall on the downside. That being said, $65 a barrel is still a pretty good number. Oil companies are doing just fine at $65, they would be doing fine at $60. We think a lot of the real volatility is going to take a step back at this point. We’d like to see a stable high-$50s to high-$60s number. At that level we think oil companies and companies using oil both do reasonably well. Of all the risks, up and down side, there are heavier risks on the downside.
Q: What are some good ways for investors who want to be involved in commodities to hedge their exposure?
A: The natural hedge to that is owning consumer companies. They would benefit if oil prices go down. If oil prices go down, the consumer spends money on everything else. Consumer discretionary companies benefit twice in that a lot of them are hotels, casinos, entertainment companies that do much better when oil prices go down. An airline does much better financially. Because prices start coming down, people travel more.
Q: What is your broader outlook for commodities?
A: There’s a lot of differentiation in commodities. You can’t treat it as one entity. I think a lot of this trade war stuff is going to end up resolving itself, and that’s going to lead to a lot of US commodities being exported to China. So that’s going to be liquefied natural gas, oil perhaps, buy also soybeans and other agricultural commodities. I think the trade war stuff will be a possibility. It’ll be messy getting there, but over the next six to 12 months it’s going to be a positive for global trade. That’s going to help agricultural commodities by and large.
Most agricultural and exportable commodities have upside pressure because of both the likelihood of trade but also the expense of transportation, but some of these commodities that have been held hostage have downside pressure.
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