I’m not sure how many people had “World War III catalyst” on their commodities supercycle bingo card, but starting last year, there were no shortage of calls for a historic and sustained rally in raw materials.
In November, for example, SocGen suggested, the world should “expect significant energy storms ahead [with] prices much higher at times, and prone to turbulence pretty much all of the time.”
As early as January 2021, JPMorgan cautioned that a “full-blown energy crisis” could be in the offing. “In a scenario of stronger post-COVID growth and inflationary pressures, energy needs could result in significant supply-demand frictions,” the bank said. “Given the low level of new investing in traditional energy, and inability to quickly change the popular investment, ideological, and geopolitical paradigms, it is possible that a full-blown energy crisis of the western world could materialize with a potential to destabilize financial markets, economies and more broadly societies,” the same note warned.
On Thursday, the bank’s Natasha Kaneva said Brent could reach $185 by year-end in the event Russian supplies remain disrupted. On her estimates, as much as two thirds of Russian crude is being subjected to what other analysts are calling a buyers’ strike.
And it’s not just crude, of course. Almost everything is rising. Indeed, the commodities crisis exacerbated by the conflict in Ukraine is on track to land in the history books.
Through Wednesday, the Bloomberg Commodity Spot Index was on track for its largest weekly gain since the 70s (figure below), and was all but guaranteed to break the record in data back to the 1960s.
The index came into Thursday up 8.6%. The all-time weekly mark was 9.7% late in Q3 1974.
This is very vexing for a Fed that’s struggling to convince lawmakers and consumers that it can wrestle inflation back under control without simultaneously causing a recession. Jerome Powell on Wednesday said he still believes the FOMC can engineer the mythical “soft landing,” which he suggested isn’t as rare as people tend to think.
I’m dubious. The Ukraine crisis materially raised the odds of stagflation, and although the US consumer seems to be holding up reasonably well, sentiment is very poor and public faith in the government’s economic policies has cratered. The figures (below) are slightly dated — they’re derived from January’s University of Michigan sentiment dataset, but they get the point across.
At this juncture, you’d probably need a drunk Whip Whitaker to land the plane with minimal casualties, and even then, the landing wouldn’t be “soft.”
China is said to be moving aggressively to secure critical commodities. “Government agencies, including the country’s top economic planning body have been ordered to push state-owned buyers to scour markets for materials including oil and gas, iron ore, barley and corn to fill any potential gaps brought on by the [Ukraine] conflict,” Bloomberg reported this week, citing unnamed sources and adding that “the officials made no mention of prices… indicating the cost of imports isn’t a focus right now.”
“Note that during the big stagflation shock of 1973/4 only commodities worked,” BofA said last week, referencing the figure (above).
Writing in her latest, RBC’s Helima Croft was unequivocal. “Unless Russia quickly returns its troops to the barracks, it looks like the only way is up for oil prices,” she said, noting that the same goes for “a whole suite of commodities given Russia’s super store status.”
Interesting that Real Estate improved significantly during stagflation ’73. I expect it will perform in the opposite direction, by a much larger magnitude this time around.
The commodity bubble bursting in fall 2022 will be the next “big event”. The demand side of the commodity bubble is all about re-adjusting supply chains and ordering 2x-10x more than you need just to guarantee supply. Consumption is driving demand of durable and non-durable goods, but end demand is only up a little and no where near the spike up in commodities would indicate. Let us also not forget the buying of stuff was financed by stimulus. And… the supply side of the equation is the real issue at present due to pandemic and the violence in Ukraine.
These dynamics will get resolved over the summer when the confluence of lowered demand (less buying of goods, more buying of services, no stimulus, falling real incomes) and smoothed supply delivery will lead to an oversupply of inputs in inventory and input (aka commodities) demand will fall off a cliff.
This is all assuming the FED gets more dovish than they are presently. If they don’t gauge this shift the problem will be compounded and the contagion to all risk assets will be significant.
Also- 2s-10s split just above 30 bps? The economic dashboard warning light is on.
To clarify, I was referring to the demand and supply dynamics as a whole will get resolved by summer. As for Ukraine, I hope the violence stops tomorrow/immediately. I’m not optimistic is will get resolved any time soon.
Drought and rising temperatures aren’t the only issues for agricultural commodities. It now appears that the very way we farm has been destroying soil. Just as clearcutting forests is bad for forests, the way we farm has been “killing” soil.
https://www.scientificamerican.com/article/only-60-years-of-farming-left-if-soil-degradation-continues/
https://www.usda.gov/media/press-releases/2022/02/08/climate-smart-commodities-expanding-markets-hear-what-theyre-saying
https://www.bbc.com/future/bespoke/follow-the-food/why-soil-is-disappearing-from-farms/
Absolutely correct.
I just saw this scrawled on a bingo card:
“Novokmet et al. estimate that in 2015 the hidden foreign wealth of rich Russians amounted to around 85 percent of Russia’s G.D.P. To give you some perspective, this is as if a U.S. president’s cronies had managed to hide $20 trillion in overseas accounts.”
That’s a fair chunk of change that hopefully will be locked up and not available for geopolitical instability. It’s hidden wealth like this that needs to be contained and not made available to friendly banks in India, as an example.
If Zaporizhzhia nuclear plant goes Chernobyl after shelling by Russian forces, odds of NATO entering the war, with a “no-fly zone” or more, go up. Setting off a Chernobyl in the heart of Europe is Article 5 stuff. Domestic approval might suffer too, since winds sometimes go from Ukraine east to Russia.
Screened out Century Aluminum some time ago and bought, good timing for me. I prefer it trade w/o a war.
Time to open up Keystone and encourage fracking in US.
The US needs to stop buying oil from Russia. Last I read, we are still buying 650,000 barrels/day- equating to 4% of our oil usage.