The world is entering a “long-lasting bull market” for commodities, with even oil set to benefit as recent underinvestment, dollar weakness, government spending and the energy transition boost demand across the board, Goldman Sachs’ global head of commodities research, Jeffrey Currie, said Dec. 8.
Speaking at an FT Live event, Currie said “every single commodity market with the exception of wheat is in a deficit today” and highlighted the example of oil, saying capital expenditure in the oil sector had fallen an unprecedented 40% in the first half of the year. He argued that even oil demand would be boosted by spending on the energy transition, due to the volume of oil consumed in the course of green energy infrastructure projects.
Goldman Sachs has a “target” price for oil of $65/b for the end of 2021 and is forecasting rapid demand recovery, with global demand set to reach 102.5 million b/d in 2022, he said, up from the International Energy Agency’s estimate that oil demand in 2019 was at 100.1 million b/d.
“It’s important to separate the vaccine, which is a tactical upside catalyst, from the pandemic itself, which is a structural catalyst to a longer-lasting bull market. As we look out to 2021 the vaccine creates that V-shaped recovery… but looking beyond that we believe it’s the beginning of a structural bull market not only in oil, but across the entire commodity complex,” Currie said.
Despite a reduction in oil demand for business travel, “we think the market’s going to be in substantial deficit throughout the end of next year and beyond into 2022… You have structural under-investment in supply — we call it the revenge of the old economy. It’s not just oil, it’s metals, mining, the entire old economy has shortages in investment,” he said.
Redistribution
“The second theme, policy, sits at the center of the demand story. The big catalyst that the pandemic shifted is that policy after 2008-9 was directed at market stability: whether it was OPEC, the [US Federal Reserve,] the Chinese five-year plan, everything was around financial stability. Now, all the policy is around social need, and social need creates a redistribution of wealth towards lower-income, income-constrained households that consume a lot more… Demand is relatively strong across the board,” Currie said.
“We call it revving commodity demand — redistributional policies, environmental policies … and then there’s the versatility in supply chains” in the form of stockpiling of commodities by countries such as China, he said.
“Policy-driven demand is going to create a capex cycle that is bigger than the BRICS in the 2000s, not quite as big as the ’70s, but we’re talking about that kind of a bull market in commodities,” Currie said.
“It’s the same three legs everywhere — redistribution, Green, and then something to deal with the resilience of supply chains — all [governments] are focused on that, whether it’s the US, Europe or China,” he said, arguing the policy side of the new cycle would be kick-started by a potential $500 million stimulus likely to be approved by the US Congress in the coming days.
Currie went on to argue that a weakening US dollar was also providing “tailwinds” for the commodity sector, with the effect already evident in price rises in oil and commodities such as copper and iron ore, with iron ore prices hitting seven-year highs on Dec. 7. “This is not something we’re forecasting for the future — we’re inside it right now,” he said.
On the topic of energy transition, Currie played down some of the more optimistic forecasts by his fellow panelists on the pace of progress in battery technology, and the rise of electric vehicles, highlighting among other factors limitations in lithium availability.
“Right now Tesla and Apple consume 50% of the world’s lithium market. These metals markets cannot accommodate scaling up these battery technologies at the rates that are potentially anticipated here,” Currie said, going on to voice skepticism about the pace of improvement in battery technology.
— Nick Coleman
