Commodity research house of the year: Macquarie Group

Macquarie Group’s dedicated Commodities Strategy team comprises 10 analysts spread across offices in Houston, London, Shanghai, Beijing and Gurugram, India, who operate within its Macro Strategy Group. The team works closely with Macquarie’s economists and other sector strategists, as well as dedicated fundamental desk analysts who specialise in particular regions or products. The Commodities Strategy team is able to provide a full-service analytical offering across energy, metals and bulk commodities markets while retaining a strong commercial and client focus

“This setup enables the team to conduct detailed fundamental analysis, while also viewing markets in a wider macrofinancial context, to provide clients and internal stakeholders with key decision-making support,” says Marcus Garvey, head of metals and bulk commodities strategy at Macquarie. “This allows us to offer our clients a top-tier service in physical commodity marketing, financing, derivatives trading and investor products, creating a core requirement for market-leading research and analysis,” he adds.

The robustness of the breadth and depth of Macquarie’s Commodities Strategy team was evident in its integral role in helping clients and colleagues not only navigate the unprecedented market challenges posed by the Covid‑19 pandemic, but also capitalise on the opportunities it created. An immediate response of the team to the pandemic was to increase its analysis of non-traditional high-frequency activity indicators to rapidly assess evolving global supply/demand dynamics and launch new publications – such as Real time energy demand indicators – to keep clients abreast of the fast-changing environment.

“Our real-time energy demand package was perceived as the very first comprehensive high-frequency Covid‑19 oil and gas tracking publication on the Street, receiving extremely positive feedback from clients,” says Vikas Dwivedi, head of energy strategy.

Macquarie also leveraged its best-in-class supply modelling capabilities to be the first to forecast the steep drop in US shale oil production, and provided clients with comprehensive tracking of the supply disruptions felt across global metals and bulks markets. For crude oil, for example, following the dramatic measures taken by the Organization of the Petroleum Exporting Countries (Opec) Plus, Macquarie was also able to create a non-biased data set of global spare capacity that went beyond the traditional Opec spare capacity metrics that have been used for decades. This framework enables clients to run a series of supply/demand scenarios to assess the market impact of spare capacity being converted to actual production in future months.

More recently, Macquarie’s Commodities Strategy team also collaborated with its in-house geologists to correctly identify that flooding at Norilsk Nickel’s mines in Russia posed an underappreciated threat to global palladium supply, helping clients manage risk accordingly. In a similar vein, Macquarie leveraged its detailed understanding of physical and derivatives markets to help capitalise on 2020’s unprecedented divergence in gold prices between New York, London and China (Shanghai). This blend of financial and fundamental analysis further enabled Macquarie to identify early the potential for China’s Shanghai Futures Exchange aluminium market to trade at a premium to London Metal Exchange prices.

“Taking into account the extent and composition of relative positioning across exchanges and then backing this up with the assessment that, contrary to common perception, China’s physical market was swinging into deficit, we helped clients understand a trend that has upended the metal’s global trade flows,” says Garvey.

“Indeed, we are not afraid of making counter-consensus calls and, based on rigorous assessments of well productivity, are also now forecasting a far faster than consensus rebound in US shale production during 2022,” adds Dwivedi.

Over the past year, Macquarie has also implemented data science techniques, including the use of Python for data wrangling, visualisation and machine learning. This has increased its ability to combine deep fundamental knowledge of markets with quantitative approaches and, in the process, Macquarie has been able to help its clients better understand market moves.

“We are finding this combined ‘quantamental’ approach to be considerably more powerful than either the self-standing fundamental or quantitative approaches,” says Dwivedi. “One particularly striking conclusion from this analysis was the value for oil producer clients in selling backwardated forward curves, something many would have previously considered anathema.”

On a longer-term view, the Commodities Strategy team is also helping Macquarie and its clients prepare for and benefit from the energy transition by, for example, working with Macquarie’s structurers to create reweighted investor products and expanding its coverage of carbon markets to meet rapidly growing client interest. The team is also collaborating with colleagues from other Macquarie divisions, such as Macquarie Asset Management and the Macquarie Green Investment Group, to launch an internal Climate Intelligence Unit.

Additionally, the team is helping individual clients better understand their absolute and relative positioning with respect to emissions, advising them on the steps they can take to improve their carbon footprint and how to effectively communicate these improvements to investors. Examples of this initiative include deep-dive assessments on the carbon intensity of various oil producing fields worldwide and calculations on the carbon intensity of individual downstream refining facilities.

“Finally, as we consider both the likely winners and losers from energy transition among the commodities under our coverage, we remain grounded in our assessments and avoid being caught up in market hype,” says Garvey.

“There is considerable risk for capital destruction on the path to an ultimately successful outcome and, utilising our full analytical skill set, we aim to help clients avoid the pitfalls and make the most of the opportunities in the coming years,” concludes Dwivedi.

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