October was generally a strong month across the oil complex. Yet during that period gas and coal prices more or less halved. The interaction between fossil fuels continues with European gas prices ending their free fall at levels where oil prices were no longer competitive at substituting it. Spot crude oil balance tightness remained relatively stable in October and softened a touch early November. We see the risk that increased tightness reasserts itself as jet fuel demand picks up more rapidly into the second half of November with air travel reopening.

In addition, industrial activity remains strong globally. There is an off risk in the background that more lockdowns take place in China if there is further increase in COVID cases. Considering the extent of energy shortages at the moment in China it is not inconceivable that lockdowns become necessary to curtail unsatisfied demand. For now, we still see China capable of avoiding large lockdowns but if energy prices -or simply energy availability- was to be particularly challenging for the CCP then a “coincidental” large Chinese lockdown is a possibility.

The other risk to an otherwise upside skewed oil market into the winter is the now well advertised potential release of US strategic petroleum reserves (SPR). Although, at the time of writing, we are more of the idea that the US administration is trying to verbally intervene on the market to cap prices, it remains possible that they introduce a price to release mechanism to effectively achieve it. We have seen during the summer that China tried a similar strategy with 70+Mb of release. Such action has somewhat slowed the price increase in the short term but eventually proved ineffective. In the case of the US, enacting a price to release mechanism in a tight market would potentially create a risk that the market runs to lift the SPR while it’s available.

That additional oil supply might even be sent to China which has reversed from destocking to restocking – they destocked at $65 in the summer to now restock at $80+! Overall, the balance of risk remains for a price spike into winter and possibly beyond. While China removed some skewness to the overall energy complex by restarting coal mines in a hurry, we still see significant tail risk in the future price path.

Strategic Commodities Fund finished the month up 1.8% equally driven by directional and volatility allocations. We remain constructive and see the upside risk theme started in September continuing. We are also constructive middle distillate margin and have started adding cracks in our relative value bucket.

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