Commodities in Focus: How Oil and Geopolitics Shape Markets

In this episode of the Interactive Brokers Podcast, commodities expert Will Rhind joins to unpack how oil markets are being shaped by geopolitics, inflation pressures, and shifting global supply dynamics. We explore what’s driving recent volatility and how investors can use commodities to diversify portfolios and navigate uncertainty with more confidence.

Summary – IBKR Podcasts Ep. 379

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone. Welcome back to Interactive Brokers Podcast. I’m Jeff Praissman. It’s my pleasure to welcome back Will Ryan, founder and CEO of GraniteShares. Hey, Will, how are you? 

Will Rhind

Hey, good. Thanks, Jeff. 

Jeff Praissman

Always love having you come in for our monthly talk. And for our listeners, Will is a long-time commodities expert, and today we’re gonna explore, you know, how investors can think about commodities and portfolios, how geopolitics is shaping markets, oil markets right now, and also how investors can navigate this volatility with a little bit more disciplined, data-driven approach. So Will, I want to kind of kick it off with the big picture. Why should investors consider a commodity allocation alongside traditional stocks and portfolios? 

Will Rhind

Well, historically, commodities have acted as a diversifier to traditional stocks and bonds. If you think of, you know, the two major asset classes being stocks and bonds, commodities arguably is the third in terms of importance. And so typically, you have portfolios that are constructed with stocks and bonds, and then people are looking to add more diversification, use commodities, and they function as a diversifier because it’s a different return stream. 

You know, what drives the price of oil is very different from what drives the price of NVIDIA or Amazon, and also what drives bond prices. So they act as a diversifier. They also act as a hedge against inflation. Why is that? Because commodity prices themselves can be a very specific root cause of inflation. Clearly, if the price of oil is rising or other commodity prices are rising. So that is typically really the two big reasons that people include portfolio commodities in a portfolio. 

Jeff Praissman

And why do they provide— is it just because they just react actively to market? Like that’s how they provide diversification benefits? Especially it seems like in periods during market stress, people kind of tend to flock toward them. 

Will Rhind

Yeah, I think that people are always interested from a diversification perspective. It’s about the optimal return per unit of risk. And so when you add, you know, assets that are not correlated together, you lower the risk of the overall portfolio. And so that’s what attracts people to commodities. And the reason why they are less correlated with traditional stocks and bonds is because the drivers behind commodity prices are just different. And so they are additive to a portfolio, and therefore, you know, they operate in different ways. And certain commodities, you know, such as oil, as we’re seeing right now, can spike very violently when there are particular crisis events at the moment, and that can add value, especially when people are looking to hedge energy prices within a portfolio. 

Jeff Praissman

Yeah, and I think it’s almost, for probably some of our listeners, it almost seems a little counterintuitive though with inflation, right? Because people just associate inflation— everything’s going up, right? They don’t necessarily kind of focus on different items. They just say that the bread’s going up, their gas is going up, whatever. But how is that relationship different between commodity prices and inflation, and when do they actually— I guess kind of high-level view of the mechanics of how they function as that effective? 

Will Rhind

Yeah, I mean, I think first and foremost, inflation is normally viewed, for right reasons, as a negative. So like you just said, the cost of bread’s going up, the cost of gas is going up. That means people are paying more for goods or services. So that’s typically a negative because it’s costing you more. But if you put it in the portfolio context and say, okay, I realize that this is the thing. How do I profit from this? Or how do I make money from this? Then you want to be owning assets that benefit or rise with inflation. And so commodities, because, for example, energy prices— let’s just take that— energy prices run through everything in the economy. And so if energy prices are rising, guess what? That feeds through into goods and services. And so if you want to try and hedge a portfolio, meaning that you make money from inflation rises, then commodities is one way to do that. 

Jeff Praissman

And when people think about commodities, you know, you and I have talked about before, gold probably is the first one to come up. But how important is it for investors to look beyond gold and understand that there’s a broader commodity universe out there? There’s energy, there’s metals, there’s agriculture. 

Will Rhind

Yeah, I think that there’s a great example where gold has historically functioned as an inflation hedge. People do think of commodities being synonymous with just gold. It’s something that everybody in the world knows what gold is. They have a view about it. But at the same time, you have to also be aware that commodity markets are more than just gold. 

And I think for a lot of people, energy is the most important commodity complex. And so being able to add exposure to energy in the portfolio is really key, especially if you are looking to correlate with inflation or particularly take advantage of inflation because energy is actually the most positively correlated with traditional inflation measures. 

So if that’s your goal, to try and hedge a portfolio against inflation, then certainly broader commodities, including energy, would be a place to look. 

Jeff Praissman

Yeah. And commodity markets can be volatile and somewhat often headline-driven. How should investors think about participating in that volatility without just simply reacting to the short-term news? Like, obviously, the Iran conflicts are in everyone’s mind right now and all over the headlines. 

Will Rhind

Yeah, I mean, I think that there obviously are a number of ways to do it, but I think the most sensible approach is to think about it as a broad allocation in a portfolio. So in much the same way as an investor would buy exposure to the S&P 500 or to a large bond index through an ETF, you can do the same thing with commodities. And in that way, you don’t have to worry about whether oil’s gonna outperform natural gas or whether corn’s gonna outperform wheat. You just hold them all in a basket or in a portfolio, and that way you can add a percentage to your portfolio and still benefit from an allocation to commodities, but without making that sort of micro decision about which commodity specifically to back. 

Jeff Praissman

Yeah, so it sounds like investors really have the choice whether they want to target their exposure to a specific commodity, have a broad basket of commodities— you know, in equity terms, like an index basically. And it seems like there’s probably a need for both, depending on the investor and the user. 

Will Rhind

Yeah, that’s right. And of course, investors have different needs, and the great thing about the ETF market today is you’ll find ETFs on almost everything. So if you have a very strong view on oil, there are ETFs that cater to that. If you have a very strong view on some of the metals or agricultural commodities, there are ETFs there. But also, if you don’t— agnostic per se to individual commodities, that don’t want to get that granular and just want the one-ticker solution— then there are plenty of ETFs for that. 

Jeff Praissman

And you mentioned oil, and you know, obviously that’s in the news right now. With everything going on, I’d like to kind of just focus on oil for a second. How are the current oil prices— you know, how are they balancing the expectations for the global demand against the rising geopolitical supply risk that we’re seeing? 

Will Rhind

So at the moment, clearly it’s a very volatile period in the oil market. We’ve seen oil over a hundred dollars a barrel, you know, slightly less than that today, given obviously the market’s expectations of— hopefully— there’ll be some kind of resolution to the Iran war. But, you know, there’s been big volatility almost on a daily basis regarding the global supply of oil, particularly coming out of the Middle East, and, you know, therefore its knock-on effects on the global economy. 

We’ve seen gas prices rise, you know, obviously here in the United States, but particularly in countries where, you know, they’re not completely energy independent, such as Europe and Asian countries as well. And so this is one of the most extreme expressions of when you see distress in commodity markets. And we’re seeing right now the impact that oil has on the global economy and how that rise is felt by almost everybody everywhere. 

Jeff Praissman

And for investors and traders, I mean, there’s a lot of noise out there, right? And kind of distinguishing the signals from the noise is pretty important. How do they separate the short-term geopolitical headlines versus the actual disruption that oil production or transportation actually could occur or is occurring? 

Will Rhind

That’s a very interesting question. You know, I think that it is tempting to get swept up in the headline volatility that we see on almost a daily basis. But I think that if you can look beyond that— number one, having a long-term allocation to something like commodities is probably always something to consider, as opposed to trying to react to short-term events. But perhaps a good example is something like Russia-Ukraine, where that was incredibly disruptive after Russia first invaded Ukraine. As you can see, the longer that goes on, the more that sort of gets priced into markets, and ultimately markets move beyond that conflict and focus on other things. And I think the market’s desperately trying to move on right now from the Iran war. And you know, I think you can see that in the pricing, in terms of equities hitting new all-time highs, and oil coming off. But of course, you know, that situation can change, particularly if the Strait of Hormuz, for one, gets disrupted in a major way. Again, all of that can turn on its head quite quickly. 

Jeff Praissman

Right. And is OPEC playing any kind of role in stabilizing the oil markets or amplifying— are they sort of just kind of on the sideline with this right now? 

Will Rhind

I mean, OPEC is always a very important part of the overall view on oil prices. But of course, this situation is unique because it captures a lot of the major OPEC-producing countries right in the middle of this storm. And so for anyone from the Saudis to other oil-producing countries in the Middle East, I mean clearly their production is directly affected by what’s going on, and the ability to take the oil product and ship it globally. So, you know, perhaps in normal times, yes, they would be able to act as a stabilizer, but as of right now, they’re being directly affected by this. And therefore, the ability to stabilize crude production and ship and move crude around the world is really key at this stage, I think, to stability. 

Jeff Praissman

And oil obviously comes from a lot of places in the world that tend to pop up when we talk about sanctions, right? Russia, Iran, Venezuela— how effective or significant are these sanctions and the risks they come with, and actually the enforcement of them when it comes to supplies from these countries? Or can they sort of get lifted when they need to be? 

Will Rhind

It’s tough. I mean, I don’t want to say that they’re not effective because I think that’s clearly false. I think they’re just never going to be as precise a mechanism as perhaps they’re intended to. So, for example, take Russia. Although right now those sanctions have been temporarily lifted due to the global oil price, you know, Russia’s been heavily sanctioned in terms of their crude exports, and those Western sanctions cover about 70% of crude exports from Russia. 

However, their exports have remained resilient because they have other buyers that are not subject to— or don’t, or ignore, I should say— sanctions, such as China. So this has been the same thing that has gone on with Iran and the Iranian economy for the longest period of time. That economy’s been under sanctions, but they still find ways to sell to people who either are outside of sanctions or ignore sanctions completely. And so again, they are effective, but I don’t think they can ever be perfect. And that’s really the problem. 

Jeff Praissman

And I kind of want to take a step back now and focus more on just different investment products, right? And also just signals as well. So like, obviously inventories matter, but then, you know, people may not realize there’s futures on these commodities— like there are futures curves that come into play. There’s option markets, there are ETFs. How can they all be used basically to reveal how these geopolitical risks are being priced in? Like, do they all kind of coordinate with each other? Are there different things to look for with the different data? 

Will Rhind

Yes— no, I mean, absolutely, because they are all keyed off of the actual markets themselves, whether it’s completely directly, in the case of if you own physical gold, for example, or whether it’s again indirectly through a futures contract that’s linked to oil deliveries at a certain point in time. They’re all ultimately linked, directly or indirectly, to that underlying commodity price. And therefore, they are the transmission mechanisms for price discovery in the market and correlate exactly with what’s going on. I think where perhaps some confusion can happen is that oil does have a cost to ship and store around the world, and that’s reflected in the futures curve of oil, which is the price of oil to be delivered today at the front of the curve and the price of oil to be delivered in the future, which is further out the curve. 

And sometimes you can have a situation where the front of the curve trades higher than the back of the curve, and then vice versa. And those situations will dictate whether there’s more urgency to deliver a barrel of oil today or whether you deliver a barrel of oil in the future. So at the moment, we call that curve backwardated if the price is higher today than it is going forward, and the opposite situation we call contango, where the price for delivery today is lower than the price for delivery in the future. 

Jeff Praissman

And there’s often been an assumption that U.S. shale can act as a shock absorber in these situations. How responsive is U.S. shale to these geopolitical supply disruptions, and where are the limits to that response? Where do they show up? 

Will Rhind

So shale definitely is a response mechanism. I think that shale correlates, again, largely to the global price of oil. And, you know, as we’ve seen in the past, a lot of shale production was brought on when capital discipline was perhaps not as strong as it is today, and of course where interest rates weren’t as high as they are today. And the net result of all of that was that the industry brought on too much production that was overfinanced and ended up being a big sort of bust for shale. We’re now on the other side of that, but it’s still strongly correlated, I think, to the price of oil and to the ability for companies to finance and their capital discipline within the market. 

So certainly, with prices as high as they are now, it will encourage more production, and production is certainly meaningful. So I think shale or crude production, at least, is about 13.5 to 14 million barrels this year, and shale plays a big part of that. But it’s something, again, that is driven largely by the price of oil because companies have to be profitable and have the ability to have sustainable financing to access that. 

Jeff Praissman

And, you know, final question, Will— in this day and age, there are so many tools for investors to get exposure to commodities and energy. Not just the futures, obviously, but there are energy ETFs or ETNs, there’s options, there’s spread strategies. How can investors use these tools to kind of manage this oil-driven volatility more effectively? 

Will Rhind

I mean, the great news is that there’s now a huge array of choices, and really you can almost buy an ETF for everything. I think in terms of oil shocks themselves, you have the ability to participate in that directly by buying ETFs that just have underlying oil futures exposure. You can buy a broad commodity ETF that invests in the underlying commodity futures— a big portfolio, like an S&P 500-type approach. Or you can buy exposure to stocks that are involved in oil production or oil services. So there are a number of ways to do it, you know, and again, every expression of that has its sort of pros and cons. Ultimately, it’s about what do investors feel most comfortable with? What aligns with their investment goals or not? But certainly the tools are out there for people to take advantage of. 

Jeff Praissman

Will, this has been great. For our listeners, you can find more from Will at graniteshares.com. He comes in once a month to our studio for a great podcast on commodities. And, you know, my takeaway is that commodities, and especially oil right now, really reflect real-world forces like geopolitics, inflation, and supply constraints. But there’s also a lot out there for investors to get either broad exposure or targeted strategies, too. And just understanding these market functions is really essential for them.