The winners and losers of the big reflation trade

By Ryan O’Malley, Fixed Income Portfolio Strategist

Not all commodities have benefited equally in reflation / reopening trade. Some exhibit structural imbalances between long-term supply and demand, while others have experienced short-term speculative price increases that have proven unsustainable.

Forest products / lumber

This sector benefited from a hyperbolic housing market in late 2020 and early 2021 as many former city dwellers took advantage of the work-from-home revolution and moved to the suburbs; However, after mortgage rates fell in February, the cost of owning a home quickly reached unsustainable levels for many middle-income Americans. The speculative bubble in lumber futures quickly reversed, and lumber prices are now down 65% in the past three months, and below their starting point in 2021, as home sales have cooled significantly.

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Industrial metals

Aluminum and steel continued to hold their peak prices despite concerns about a global slowdown, indicating that there could be a structural supply / demand imbalance in the long run.

Favorable winds, such as the trillion dollar infrastructure bill, combined with a large backlog of commercial property construction that was stranded during the worst of the Covid-19 crisis, drove the growth in demand for steel and its peers to far exceed the growth in supply. Since the nadir of June 2020, the demand for steel in the United States has increased by about 65%, while the supply has only increased by 44%.


Energy commodities have proven to be even more resilient. Demand has almost reached pre-pandemic levels, but supply remains limited as U.S. shale producers have kept production below 2019 levels and have shown great discipline in their balance sheets. West Texas Intermediate crude oil has hovered around $ 70 / bbl over the past two months, a level not seen since 2018. And natural gas is poised to break through $ 5 / MMBtu, a level not seen since 2014.

Best choices

Given this dichotomy in commodities, our preferred investment grade credits include Energy Transfer Partners (ETP) and Cenovus (CVECN). Both are expected to benefit from strong and continuing demand as the economy reopens and they use excess liquidity to rebuild their balance sheets.

In the high-yield space, we favor US Steel (X) and Alcoa (AA). Both are major producers of industrial metals and occupy favorable positions in the supply chain to take advantage of the extremely high demand for their products. We also like Occidental Petroleum (OXY), an angel oil producer that takes advantage of the high price environment to sell non-core assets to reduce its leverage to investment grade levels. Finally, we favor Teekay Corp. (TK), a liquefied natural gas (LNG) maritime transport supplier. The company is taking advantage of the voracious demand for LNG from countries in Asia and Latin America that do not have the monstrous supply from the United States.

Disclosures: This is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained and are based on sources that Sage believes to be reliable, we do not guarantee their accuracy, nor the information, data, figures and underlying figures. the accuracy or completeness of the information available has not been verified or audited by Sage. Further, we do not represent that the information, data, analysis and graphics are accurate or complete and, as such, should not be construed as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial situation. All investments involve risk and may lose value. Past performance is no guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment advisor providing investment management services to a variety of institutions and high net worth individuals. For more information about Sage and its investment management services, please visit our website at or view our Form ADV, which is available on request by calling 512.327.5530.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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