Interview, Fireside Chat
The Case for Commodities: ‘Super-Backwardation,’ Structural Demand and Inventory Shortages
- U.S. economic growth is projected to maintain an acceleration pace, while China shifts from "first gear" to accelerate following weak Q4 data, with Omicron's economic impact anticipated to be significantly smaller than initial estimates.
- Global commodity markets are expected to remain at critically tight levels with high, spiky prices driven by demand levels that will continue to climb even if economic growth slows, necessitating a demand reduction far greater than a simple slowing of the growth rate to align with constrained supply.
- Capital expenditure and greenfield activity in oil drilling and mining are not forecast to surge due to poor historical returns and ESG constraints directing approximately $300 billion of commodity-related investment toward green initiatives over the next several years.
- Oil prices are forecast to reach $105 per barrel in the second half of the current year, with risks skewed to the upside if supply increases do not materialize, particularly as OPEC approaches capacity constraints and spare capacity is exhausted.
- The 2022 economic landscape is expected to be defined by raw materials constraints rather than the logistics issues prevalent in 2021, with physical goods shortages potentially slowing growth before interest rate hikes reduce overall global activity.
- Disruptions to energy supplies between Russia and Western Europe are considered very unlikely due to mutual dependency, though unintentional accidents such as pipeline events remain a risk, while corn prices are projected to trade around $7 per bushel against a backdrop of low inventories and worsening weather in Brazil.
- Despite a recent diminution in views on substantial upside during the first five weeks of the year, the commodity rally is predicted to be volatile, with investors advised to remain positioned until triggers like increased supply or demand destruction occur.
- Structural demand growth for commodities is attributed to lower-income and disadvantaged groups consuming "old economy goods," supported by three key policy drivers over the next decade or more: income inequality/redistribution, decarbonization/climate change, and trade war/de-globalization.
- Global green investment capital expenditure is expected to reach upwards of $16 trillion this decade, with an equivalent amount projected for the following decade, driving demand for copper as the "strategically most important commodity" and aluminum despite the latter's classification as a "climate paradox."
- Asset managers are predicted to increasingly utilize physical goods as a hedge against inflationary and decarbonization risks, representing a significant allocation opportunity given that only approximately 1% ($225 billion) of the estimated $250 trillion in global assets is currently invested in commodities.