Commodity Watch: The Physical World Always Wins

<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">What can corn’s price in the 2000s tell us about oil prices today? A lot.&nbsp;</p><p>Corn prices doubled between 2007-2008 driven by a variety of factors: droughts, demand, and new uses (ethanol). But the primary culprit was an influx of speculator capital into commodities. Those inflows from pensions, hedge funds and indices increased approximately 30x over seven years (from $15 billion in 2004 to $450 billion in 2011).</p><p>In theory, producers and hedgers offer positive risk premia to entice speculators into a long position. But the increased number of participants, since 2004, with varying risk appetites and capital structures changed the market. For one, it increased commodities futures’ correlation to other markets (corn prices crashed in the global financial crisis as speculators unwound their positions to meet other obligations). It also enhanced momentum trades as trend followers chased price.</p><p>More interestingly, financialization obfuscates price discovery because speculators trade futures as financial assets reflecting market sentiment instead of actual supply-demand. Corn futures exhibited aberrant behavior in 2007 as futures failed to converge with spot prices at expiry with some contracts expiring 35% higher than cash price. Granted, corn had structural flaws. For example, storage rates hadn’t changed since 1980, which allowed speculators to trade warehouse receipts (CME later fixed it by introducing variable storage costs). But financialization was also evident in commodities that didn’t have these defects. Oil, for example, was up 50% in the first half of 2008 even as economic weakness was setting in and demand was softening.</p><p>Financialization is still here. A 2025 study found that since 2003 demand/supply for oil futures (distinct from actual demand/supply) materially impacted spot prices. Market sentiment thus impacts oil prices. We are witnessing it now. Even as buyers scramble for barrels and Dated Brent (“real world” price) is touching all-time highs, futures are $40 lower than Dated Brent and the market is bearish.</p><p>Financialization is everywhere.&nbsp;</p><p>Yet, unlike bets on chains selling video games where some make money (most don’t) and we get a cute movie, getting food or energy wrong has real life ramifications.</p><p>Two points to consider.&nbsp;</p><p>One, the futures market (quoted often) might be sending erroneous signals that are based on sentiment or analysis marred by ideological prisms. That means the risks in this sanguine market might be higher than perceived.&nbsp;</p><p>Two, financialization increased volatility and correlation of commodities. For portfolios to benefit from commodity exposure (and the benefits are many), they might need strategies that are closer to the physical assets and resistant to futures’ volatility.&nbsp;</p><p>Ultimately, the physical world has needs and the value of oil (and its byproducts) will be determined by the demands of eight billion people. The physical world will not bend to sentiment. Sentiment must adjust to the physical world.</p>