Fear of recession cannot dampen the commodity boom

Earlier this week, Burned crude oil fell below $ 100 a barrel for the first time in months. So did West Texas Intermediate. Copper fell to its lowest level in almost two years. It looked like inflation had done its evil deed. A recession came, and the demand for raw materials was about to plummet. And then both oil and copper receded. It lasted a full day, although the price of copper has fluctuated with the flow of news from China and the outlook for the economy for the rest of the year and in the medium term. The last rise in the price of copper was in fact attributed by some to the possibility that the Chinese government would provide further stimulus to keep the economy going at a healthy pace.

However, the rise in oil was easy to see despite the infamous uncertainty in the oil markets. And the reason it was easy to see coming was basic. No matter what happens in the speculative market, the fact that the global supply of oil is tight while demand is very lively and still increasing cannot be ignored.

The Financial Times shows it quite clearly. In an article from earlier this week that addresses the price drop across goods, the authors write so that “hedge funds have been central in recent price declines across commodities ̵[ads1]1; selling out long or positive positions in certain commodities and often replacing them with bearish efforts.”

If the big scare in 2020 and 2021 was Covid, this year has two: Russia’s Vladimir Putin and the recession. And it increasingly looks like the latter is bypassing the former when it comes to intimidation value.

Talk of recession is all over the news. Central banks are being criticized for tightening monetary policy too quickly, and accelerating the recessionary pressure. It was only a matter of time before hedge funds decided to gamble on the safe and start selling out. But, and this is the important bit, this has nothing to do with basic things. Basic is why the oil was up a day after dipping.

Exactly how much nothing market price movements have to do with actual demand and supply was sometimes recently highlighted by Wells Fargo. According to the bank’s investment strategy department, the United States, the world’s largest oil consumer, is already in one recession.

“It’s the technical part of the recession, but then it’s the meaningful deterioration in consumption and employment,” Well Fargo Investment Institute senior global market strategist Sameer Samana told Bloomberg this week. “The technical part is the first half of the story, and the main part of unemployment and consumption is the second half,” Samana added.

Inflation, according to Wells Fargo analysts, has proven to be much faster and broader than first expected, consumer sentiment has deteriorated as a result, and companies are changing their spending plans. But oil demand remains robust as it appears to be worldwide, although some analysts estimate a decline. According to Citis Ed Morse, for example, “Almost everyone has lowered their expectations of demand for the year.” Demand simply did not grow on an empirical basis to the extent that people had expected, says Morse told Bloomberg TV.

Related: Buffett buys another $ 700 million in Occidental shares

Demand may not be growing as expected – it would have been strange with these prices – but supply is not flourishing either, which probably motivated Saudi Arabia’s latest price go for Asian buyers to almost record levels. Sellers do not tend to increase prices when they expect the demand for their goods to fall.

No wonder Goldman Sachs, unlike Citi, sier that oil can still reach $ 140 a barrel, even with all the fear of recession swirling around the market. “$ 140 is still our main case because, unlike equities, which are forward-looking assets, commodities must settle for today’s mismatched supply and demand,” Goldman’s Damien Courvalin told CNBC this week.

These price estimates, both from Citi and from Goldman, do not take into account supply disruptions – the same supply disruptions that just a few months ago, even a month ago, kept markets trapped. The disturbances are expected to come mainly from Russian oil exports, but this may now have been included in the prices as it is still almost six months until the EU oil embargo takes effect.

Meanwhile, the alternatives to this supply for Europe are still few and far between just because of the size of Russian oil exports to the continent. This is likely to continue to have a bullish effect on oil prices, regardless of economic trends. Even if a recession dampens demand for oil, it will take a long time before real demand destruction of the type that Citi says can push oil to $ 65 a barrel.

Fear of recession has a solid foundation. There is little doubt about that. However, the commodity base, not only in oil and gas, but in agricultural commodities and metals, has not changed simply because hedge funds have suddenly begun to worry about a recession. They are still tight. And this puts a floor under prices that will remain there as long as supply is tight.

By Irina Slav for

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