There’s never been a better time to own commodities, according to US investment bank Goldman Sachs, which has bullishly forecast a decade-long commodity “super cycle”.
In a recent Bloomberg TV interview, the bank’s global head of commodities research Jeff Currie said he’s never in his 30-year career seen commodity markets pricing in the shortages they are right now.
Describing the current global economy as an “unprecedented” environment, Mr Currie highlighted the severe backwardation of most commodities’ price curves.
Backwardation is a market structure that indicates the cost of delivery today is higher than tomorrow. This event has only occurred seven times in the last 50 years and Mr Currie attributes it to “textbook shortages”.
“2008 was a financial crisis – this is a molecule crisis. We’re out of everything: oil, gas, coal, copper, aluminium, you name it, we’re out of it,” he said.
These historically low stockpiles combined with booming demand and supportive macroeconomic conditions appear to have created an ideal environment to invest in commodities.
This is particularly evident in the case of industrial metals where traders are paying large premiums to secure immediate supply but can also be seen in the energy and agricultural markets.
Adding to this is high global inflation making it the most bullish the global economy has been during the entire COVID-19 recovery period.
In October 2020, Goldman Sachs forecast the emergence of a commodity super cycle which could potentially continue for a decade.
Mr Currie said this year’s expected “outperformance of commodities” will be evidence of this and pointed out that investment positions in commodities are still at “very low” levels.
Using oil as an example, he said the market has the potential to get “very tight” over the course of the next three to six months but “investors don’t like commodities”.
“I think the upside over the next three to six weeks could be substantial – not only in Brent [crude] but the entire commodity complex.”
Last week, the International Energy Agency warned that crude oil prices could rise further than their current US$90 per barrel trading level as OPEC and its allies recover from the pandemic.
Saudi Arabia and the United Arab Emirates are currently the only two countries in the world that are producing more today than they could in January 2020 before COVID-19 hit the global economy.
Goldman Sachs forecast a US$85/bbl Brent price for the first quarter, although Mr Currie said this was under the assumption that Iranian crude supply re-enters the global market but that’s “looking increasingly unlikely, adding to this geopolitical uncertainty”. Hence, even higher prices of around US$95/bbl could be on the cards.
“If you look at the liquidity in the system relative to where oil prices are, it’s still at very low levels. That means the tolerance of the global economy to higher oil prices are much higher than in any other point in time that we have seen,” Mr Currie said.
“Put it in the context of wage increases and subsidies for low income groups around the world and the upside here could be substantial,” he added.
Mr Currie’s outlook for uranium is also “very bullish” on a medium and long-term basis.
“The realisation around the world is that if you really want to solve climate change and decarbonise, you need to do this with nuclear power and you need to do it with microgenerators,” he said.
“The outlook is extremely positive from a fundamental perspective, then if you throw Kazakhstan on top of it, it just creates a much more bullish outlook,” he added, referring to the ongoing turmoil in the Central Asian country that produces more than 40% of the world’s uranium.
Mr Currie also remarked that uranium could really “take off” in the event that a government in Europe decides to classify nuclear power as “ESG friendly” or “green”, which he believes is “really close to happening”.
Copper stocks are currently sitting at around 400,000 tonnes, equivalent to under a week of global consumption, while aluminium stocks have fallen due to smelters in Europe and China being forced to slash output due to rising energy costs.
Meanwhile, battery-grade lithium carbonate surged more than 400% last year to over US$50,000/t and Citigroup has predicted lithium demand will outstrip supply by 6% this year due to rising sales of electric vehicles.
The agricultural markets are also taking a hit with one example being coffee inventories falling to their lowest level in more than two decades.
From COVID-19 recovery to energy transition
Mr Currie described 2022 as the “transition between the recovery demand coming out of COVID-19 and the green capex demand that we see in 2023”.
“You can think of it as passing the baton. The structural deficits across most of these metals markets as well as energy really start to bite [in the next two years].”
“We believe that transition really gets underway in 2023,” he said.