A hedge fund run by commodities trader Doug King posted a record return last year, thanks to soaring energy, food, power and freight prices.
King’s $244 million Merchant Commodity Fund gained 74%, beating its previous best of 59% in 2014, according to an investor letter seen by Bloomberg.
London-based King, 55, is among a cadre of hedge fund managers, including Pierre Andurand, who made huge profits from commodities last year amid a global economic recovery from the coronavirus pandemic and supply disruptions.
The Bloomberg Commodity Spot Index, which tracks energy, metals and crop futures, jumped 27% in 2021, the most in over a decade.
Oil surged more than 50% to around $80 a barrel. It’s almost up another 10% so far this year. King said it could soon hit $100 and even $200 over the next five years due to a lack of exploration and investment to maintain existing supplies.
“We believe in structural supply-side commodity inflation that most will not have ever seen — the highest since the 1970s,” he said in an interview. “Only OPEC will react to price metrics and they are undershooting every month.”
OPEC Troubles
OPEC and its partners are gradually increasing crude output after making deep cuts of almost 10 million barrels a day in 2020 when the pandemic first struck. While the group is meant to be pumping an extra 400,000 barrels a day each month, many of its members are struggling to reach their quotas.
“In practice, a lot less oil is making its way to the market,” the Merchant Commodity Fund said in its investor letter. “Its members are simply unable to return to pre-Covid levels of output. This is all down to a lack of investment.”
Within the 23-nation OPEC+, the “only real spare capacity” resides in Saudi Arabia, the United Arab Emirates and Kuwait, according to the letter. Even Russia, which leads OPEC+ along with the Saudis, can’t pump much more.
“It’s no state secret that Russia is at, or very near, its maximum,” the letter said. “If not next month, then certainly by April it may not have any more barrels to give.”
While the rapid spread of the omicron variant could slow economic growth, many analysts agree with King’s upbeat assessment of commodities. Goldman Sachs Group Inc. is “extremely bullish,” citing low spare capacity among oil producers and the U.S. Federal Reserve likely raising interest rates this year, which could deter investors from stocks and bonds.
OPEC+ member Oman this week said the group would try to prevent the oil market “overheating” and didn’t want prices to reach $100 a barrel.