Portfolio Review

For the second quarter of this year, Berman Capital produced a return of 1.44% net of fees; this brings our year-to-date performance to 3.85% net of fees.

The second quarter was unusual because our futures book produced a disproportionate percentage of our returns. The sharp increase in volatility in the metals market created some great opportunities for profit on the long and short side. Long positions in silver, gold, and crude oil futures were standout performers, and a short position in copper futures at the top of the short squeeze in May.

Our best-performing equity positions for the second quarter were our two largest long positions in the portfolio: Siemens Energy (ENR), which is up over 100% this year and 42% in the second quarter; Tidewater (TDW), which is up over 30% this year.

We exited a publicly disclosed long position in Energean Plc in early May, realizing a 50% return on our investment; while it took longer than we expected for our thesis to play out, this investment was a great demonstration of our firm’s ability to generate geopolitical alpha by better assessing the risks associated with geopolitical events that provide great opportunities for price dislocations.

Our worst-performing positions were our short position in Alliance Resource Partners (ARLP), our long investment in Berry Corp (BRY), and our short position in Brookfield Renewables Corp (BEPC). We have been particularly disappointed with the performance of ARLP. Nothing suggests to us that our investment thesis has been proven incorrect, but it has remained a drag on performance.

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Commodity Complex Outlook

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Crude Oil

We think there will likely be an unsustainable spike in crude oil prices within the next few months, which will be short-lived because of two major macro headwinds: OPEC+ cuts and tepid Chinese demand growth. Bearish macroeconomic headlines about OPEC+ and the sluggish Chinese economy have overshadowed data points that run counter to the bearish narrative.

US onshore rig activity in the US has been declining rapidly this year, which, even taking into consideration efficiency gains at the wellhead, means there is minimal chance we will be seeing the same US production growth that we saw last year. The decrease in rig activity is likely the result of the recent wave of mergers and acquisitions in the exploration and production sector. Many of these companies, which would be potential acquisition targets, increased their rig count last year to boost production and make themselves more appealing for acquisitions. Once these producers were acquired, this overproduction began to fall off, and with it, the rig count.

With declining rig counts, we have seen a declining inventory of drilled but uncompleted (DUC) wells. These are oil and gas wells that have been drilled but have not yet undergone completion activities like hydraulic fracturing, so they are not yet producing oil and gas. DUCs can be a useful indicator of how much production can be brought online in a short period of time in response to price increases.

While in the short term we think crude oil prices could experience a spike in price, we are more cautious looking out over the next year. The sluggish Chinese economy and OPEC+ rolling back its production cuts could prove a major headwind for crude oil prices. Despite what OPEC+ says, we think that ending production cuts will soon become necessary regardless of the state of Chinese demand; otherwise, Saudi Arabia will risk division among cartel members. Unless the Chinese economy gets back on track, we think we will be seeing a crude oil surplus in 2025.

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Copper

While the supply side has been supportive, the demand side has remained a substantial headwind for copper prices. After a short squeeze in May in which copper prices reached over $11,000 per ton, prices fell over 15% to finish the second quarter at $9,680 per ton. The prices reached during the short squeeze were not necessarily based on supply and demand fundamentals in the global market, as it was a market inefficiency born out of the specific delivery requirements for copper futures contracts, so it is not surprising that copper prices retraced so substantially once speculative capital liquidated their long positions.

Chinese demand remains the single greatest headwind for copper prices. The market narrative is that the Chinese economy overall remains weak, particularly in the property sector, and that the Chinese government has done little in terms of stimulative policy to change that narrative going forward.

We do not entirely agree with the market narrative. While the Chinese economy is certainly in the doldrums, we think that Chinese demand for copper will be surprisingly robust in comparison to other commodities. China continues to invest substantial resources in renewable energy and electric vehicles; while these industries will not entirely make up for lost demand from the property sector, we do not see a slowdown in China’s effort to control an industry that they have recognized as geopolitically strategic. We think that the Chinese demand that the market is projecting through the end of the year is likely too pessimistic, and demand will surprise the upside in the second half of the year.

BHP's failed £38.6 billion bid for Anglo American during the second quarter provided further confirmation of our belief that current copper prices are not high enough to incentivize major miners to invest in new mine development and instead would rather invest in already developed assets, which bodes well for sustained shortages in copper over the coming decades.

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Conclusion

We continue to see apathy by investors toward commodities as an asset class, with the MAG7 continuing the take up the majority of investor attention. This serves us well; the fewer investors giving the sector attention, the more inefficient our slice of the market becomes, creating more high-return investment opportunities for the fund.