Commodity Watch: Power Shifts with Petrodollars

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI</strong><br><br>PRESIDENT OF GEMCORP CAPITAL ADVISORS LLC, PORTFOLIO MANAGER<br><br>Ahmad Al-Sati is Portfolio Manager of the Gemcorp Commodities Alternative Products strategy (GCAP) and President of Gemcorp Capital Advisors LLC, based in New York. He is responsible for leading Gemcorp’s commodities-focused investment strategy and overseeing the firm’s US advisory platform.</div></span></div><hr><p data-pasted="true">Commodity disruptions are not confined to physical markets. They spill over into financial ones. Supply constraints have rippled across the globe, affecting industries, sectors and economies (work from home edicts are already proliferating and the OECD is predicting 4.2% in US inflation). Will the US dollar (USD) be next? The USD sits at the centre of the commodity complex and could suffer collateral damage from Gulf War III as surpluses and resources shift and change.</p><p>Petrodollars have underpinned both commodity markets and the USD post-Bretton Woods. In the 1970s, after a tacit US-Saudi agreement, proceeds from oil sales, traded solely in USD, were recycled in western banks and US treasuries (around 44% of oil proceeds). In the 2000s a new cohort of oil producers flush with cash (Russia, Libya and Nigeria) channelled oil proceeds into western banks (approximately 27% of oil sales).</p><p>This market seems different.&nbsp;</p><p>Gulf producers seem largely locked out of the oil markets and may not benefit from higher prices. Russia can sell at higher prices, but it is locked out of the western banks (would they deposit cash there if they could?). And for idiosyncratic reasons other producers have no surplus. So, unlike the 1970s and 2000s, higher commodity prices might not be offset with an onslaught of funds from cash rich oil producers. At the same time, the increasing costs of Asian producers adversely impact their own surpluses.&nbsp;</p><p>Petrodollars and other surpluses financed US deficits, increased demand for USD and suppressed US Treasury yields. Less recycling of capital into the US (from the Gulf and Asia) will be felt in the demand for USD and US assets. A 2023 study found that the USD’s value is largely driven by demand for US assets (risk free and otherwise). For example, in the early 2000s, allocations away from US assets caused a 25% depreciation of USD between 2002 and 2007.</p><p>Today, the Gulf’s sovereign wealth funds have 35% of their $6 trillion AUM in US assets across public and private markets and have committed at least another $3 trillion to the US over the next decade. If all or a portion of that capital shifts back to the Gulf to shore up local economies, build and fix local infrastructure and increase overall resilience of oil’s supply chain, it will place yet one more pressure on the USD. On its own it may not be enough to cause a shock, but it comes at a time when deficits are growing, and inflation and higher interest rates continue to loom.</p><p>No single event is poised to knock the USD from its perch. Yet pressures are accumulating on the reserve currency. A lower USD increases US inflation and lowers US asset prices. It is also one more risk for investors to deal with. The benign investment environment of the last 15 years is changing. Proofing portfolios against heightened risk and potentially higher volatility may ultimately be the difference for successful returns.</p><p></p>