In 2024, he sees upside tail risks for several commodities for economic, geopolitical and climate change reasons. The Cayman fund has recently profited from cocoa and Andurand argues that copper – approaching the largest ever shortage – is a more structural trade than oil. In big picture terms, oil and gas is a circa USD6,000 billion a year market, 20 times larger than base metals at circa USD300 billion, but electrification will shift some of this spending from oil to metals. “Oil does not always have to be the larger risk in the portfolio. There are times when oil does not bring a great risk reward, but where other commodities such as copper do,” says Andurand.

The green metals narrative around electrification is part of the story, but Andurand is far from bullish on all such metals: “We have been bearish lithium because supply growth is expected to be stronger than demand growth for the coming three years, and then it looks bullish after that”. 

Andurand’s copper forecasts for USD15,000 a tonne this year and up to USD40,000 within five years are well above consensus forecasts from Bloomberg or sell side banks, that are between USD10,000 base case and USD14,000 bull case. Andurand judges that many sell side analysts may be lowballing their estimates: “Most analysts tend to be very conservative in their official forecasts in order not to make too many headlines in case they are wrong. They are risk averse, and their focus is to keep their job”.

More seriously he questions multiple aspects of their modelling assumptions: “Many do not really understand the demand inelasticity and what really makes a price. The recent price action of cocoa shows what happens when we have too little of a commodity: prices can explode. We have seen major moves in metals in the past when there was a shortage. The expected copper shortage should be much larger than any shortages we have ever witnessed. That justifies a very large price move, not a 10-20% move. Remember that copper is a very small percentage of the cost of the end-products it is used for. Supply takes many years to react, and demand is becoming less cyclical and less price sensitive due to the energy transition and the growth of AI data centers”.

Simply put, Andurand sees jaws opening up between growing demand and declining supply that could quite quickly wipe out inventories: “We are moving from a market where we had 500kt/year of mining supply growth and 500kt/year of demand growth, to a market where we will have 1MT/year of demand growth and no mining supply growth. But already we see deficits of about 500kt/year this year and next, before growing and reaching the millions of tons per year by 2028. We started 2024 with less than 400kt of visible inventories. So, there is a large probability that we will run out of visible inventories sometime towards the end of the third quarter if we do not see much higher prices before. There is about 1.4Mt in the SRB (Chinese strategic stocks), but they will only release some at prices above $10,500/ton, but not much as they know that we are starting a multi-year deficit”. Incidentally, he also views LME responsible sourcing policies as marginally bullish. 

Andurand’s metal models allow for more recycling of scrap at higher prices, but he sees limited scope for substituting aluminium, which has already been cheaper than copper for some time. Andurand is also bullish on aluminium, to a lesser degree than copper.

Energy

In 2020 Andurand profited from the Covid oil crash; in 2022 he gained from both long and short natural gas positions, and long oil, but in 2023, Andurand admits he was “long and wrong” on oil and somewhat overleveraged in some funds. The performance impact has varied greatly between funds depending on their risk mandate, but in all cases, they are up considerably since the start of 2020 or 2021.

Performance drawdowns in context 

To sensationalize headlines and stories in some media coverage, drawdowns have sometimes been quoted out of context in two senses. Firstly, they omitted to mention previous years’ performance. Secondly, they highlighted the highest risk fund, and omitted to mention lower risk funds.

In ascending order of risk target, we compare 2023 with the prior three years. 

Andurand UCITS fund was down 3.7% in 2023, but up over 53% in the prior three years.

Andurand Commodities Fund was down 10% in 2023, but up over 171% in the prior three years.

Andurand Commodities Discretionary Fund was down 38.1% in 2023, but up by nearly 500% over the prior three years.

The highest risk product, Andurand Commodities Discretionary Enhanced Fund, was down 54.7% in 2023, but up by 657% over the prior three years.

Longer term, stitching together several track records from his career since September 2004, total returns have compounded up to 11,002% as of 28 March 2024. 

In 2024 Andurand is trading more tactically, which means varying the size of the long, rather than trading short, as he would not typically trade against his medium-term view. Occasionally he may also hold “lottery” ticket call options at much higher strikes depending partly on the valuation of such options. Longer dated back-end options can also be traded. OVX, the CBOE index of crude oil volatility, can as well (though it has not yet been traded).

Predicting energy prices

Andurand accurately anticipated Saudi cuts and resurgent reopening demand in 2023 but the firm’s oil price forecast was too high mainly because it under-forecasted Russian, Iranian and US supply. 

The company now includes a team of five quantitative staff who work on quantitative trading strategies to provide some uncorrelated returns, but also provide general analytical support.

The dynamic modelling process needs to prioritize variables to focus on: “We start with a supply and demand model, which is dynamically updated as we get new data. We identify the countries where we could see meaningful differences in supply growth and follow them particularly closely. We also identify the potential risks to demand, and the potential supply disruptions. The key is to get to a probability distribution of the balance, and a most likely scenario,” says Andurand.

It is not purely quantitative – it needs to apply probabilistic judgment. “There is not enough quality data to do it based on models only, so a large part of discretion and subjectivity is required,” Andurand explains. 

A market imbalance needs to be well above the margin of forecasting error to form a confident directional view. “The balance could easily be off by 500kbd due to noise, so we would need to expect a deficit or surplus larger than 1.5mbd to have a strong directional view. But it is also important to consider spare capacity, and the expected balance in the years after the current year, to have a view on price. For our balance to be off by more than 500kbd, we can generally identify at least one key driver. In the past, surprises have come from US supply growth being larger than expected, or for example, Iranian supply being higher than expected in 2023 due to a lack of enforcement of sanctions from the Biden administration. Russian supply was also more resilient than expected in 2022 and 2023,” says Andurand.

In April 2024, after China has destocked, a backdrop of low inventories makes the balance more sensitive to several potential changes. 

Decelerating US supply growth 

Andurand has historically underestimated US supply growth, but recently since December 2023 it has surprised to the downside, and Andurand is waiting to see if this is meaningful. “The US Presidential election will not necessarily have a huge impact on US supply, which has surged under Biden. US supply growth will depend mainly on the percentage of US shale reserves having been produced, and drilling intensity from producers,” says Andurand.

He sees geological constraints in the Permian and expects that oil majors will keep a steadier hand on the tiller of supply than some smaller firms did in the past.

Non-US supply

He expects that if a Trump Presidency enforces sanctions against Iran more robustly, and is tougher on Venezuela, that will have more impact on foreign supply. But the real wild cards for oil lie in geopolitics in Russia and the Gulf.

Andurand under-forecasted Russian supply, partly because Russia managed to avoid sanctions and maintained supply despite having to accept some discounts, and payments in currencies they did not want to accept.

Drone threat to Russian supply

Now, regardless of sanctions, Ukrainian drones could be a game changer. “Drones have so far impacted about 1mbd of Russia’s refining capacity, with at least a third of this likely to take more than three months to be repaired. But I expect Ukrainian attacks on Russian refineries to intensify and become more accurate and damaging. They could eventually impact more than 2mbd of Russian refinery capacity, with repairs taking years. I think the main goal for Ukraine is to reduce Russia’s capacity to wage war. When they want to hurt Russia’s revenues, they will start attacking ports and pipelines. Drones will only create more damage with time, as their range, speed, accuracy, autonomy and explosive loads increase,” says Andurand. 

Israel and Iran

There have already been some reports of Israeli strikes on Iranian infrastructure, and this might escalate. “There are scenarios under which Iranian oil infrastructure could be seriously damaged. The more Israel is under pressure from Iran, the more at risk this infrastructure will be,” says Andurand.

Incidentally, the Iran-backed Houthi attacks in the Red Sea are not so significant for global oil prices: “They create a one-off increase in voyage times and costs but do not increase demand,” says Andurand. 

Term structure 

The backwardated term structure is also a positive driver of demand, especially from systematic funds and various other commodity strategies, including enhanced indices, attracted to the positive roll yield. Andurand also interprets backwardation as indicating declining inventories, and supply falling below demand. Higher refinery margins additionally indicate strong demand. 

Firm assets

Net redemptions around the 2023 drawdowns have been minimal. “Most of our investors have been with us for a very long time and understand that we have drawdowns sometimes. They are encouraged by the fact that we have always recovered from those pretty fast in the past, and that it can cost a lot to redeem before very strong performance,” explains Andurand. The investor base split is 57% from Europe/UK, 40% from the United States and the remainder from the Middle East and Asia.