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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Goldman Sachs Calls 10-Year Commodity Supercycle

While the markets digest the inflation numbers on Wednesday, all eyes will be focussed on the Federal Reserve's reaction to the inflation data. Many economists expected the 7%  gain in the Consumer Price Index, marking a 39-year high. Many markets, including stocks and bitcoin, have come under pressure this year on expectations that the Federal Reserve will likely raise interest rates sooner and more frequently than earlier anticipated.

Experts consider rising inflation one of the biggest market risks this year because runaway inflation could corrode asset values, limit buying power and eat away at corporate margins. In a research note, Goldman Sachs' Jan Hatzius has warned that rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, with the central bank now likely to raise interest rates four times this year and start its balance sheet runoff process in July, if not earlier.

But the commodities sector is a different beast altogether.

Commodities outperformed other asset classes in 2021 and are widely expected to remain competitive in 2022.

Indeed, Goldman Sachs global head of commodities research Jeffrey Currie has reiterated his earlier call saying we are merely at the first innings of a decade-long commodity supercycle.

Speaking at CNBC's 'Squawk Box' to break down the latest moves in oil prices, Currie says the fundamental setup in the commodities complex, including oil and metals, remains incredibly bullish.

According to the analyst, the oil markets are currently in a big deficit of 2% of global demand, with inventories about 5% below their 5-year moving average. He goes on to say the financial set up offers even more support since fossil fuels remain out of favor with the investing universe while ESG headwinds pose a major challenge for a sector that badly needs new investments if production is to keep up with demand.

It's a point that has been reiterated by UBS analysts, "relative to oil prices, the sector looks cheap. Free cash flow yields are very attractive, capital discipline has improved, and the sector should benefit as demand recovers."

Copper is the new oil

Currie also says that there has been a complete redirection of capital over the past few years due in large part to poor returns in the oil and gas sector, with flows moving away from old-world economy investing style in things like oil, coal, mining, and towards renewables and ESG-- and now there is a demand imbalance is being exposed.

The GS commodities expert adds that stretched equity valuations and low Treasury yields make commodities even more attractive for investors wary of the high risks in these markets but still hunting for decent returns. In other words, commodities not only offer good prospects on a pure return basis but can also be a good hedge against growing market volatility.

Goldman Sachs continues its bullish tone on crude prices, and has hiked its Brent crude price forecast to $90/bbl from an earlier $80/bbl.

But it's Currie's remarks about the metals sector that will probably catch the attention of ESG and clean energy investors more. According to the analyst, the biggest beneficiary of the ongoing commodity supercycle are metals, which he has compared to oil in the 2000s thanks mainly to green capex. Currie says the ESG and clean energy transition is massive, with nearly all of the world's nations pursuing clean energy goals at the same time, making copper one of the most important commodities of this cycle.

Indeed, Currie has declared copper as the new oil, noting it's absolutely indispensable in global decarbonization strategies with copper shortages already being felt.

Other notable clean energy experts share Currie's views.

New energy research outfit Bloomberg New Energy Finance says the energy transition is responsible for driving the next commodity supercycle, with immense prospects for technology manufacturers, energy traders, and investors. Indeed, BNEF estimates that the global transition will require ~$173 trillion in energy supply and infrastructure investment over the next three decades, with renewable energy expected to provide 85% of our energy needs by 2050.

Clean energy technologies require more metals than their fossil fuel-based counterparts. According to a recent Eurasia Review analysis,  prices for copper, nickel, cobalt, and lithium could reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario, with the total value of production rising more than four-fold for the period 2021-2040, and even rivaling the total value of crude oil production.

Source: Eurasia Review

In the net-zero emissions scenario, the metals demand boom could lead to a more than fourfold increase in the value of metals production–totaling $13 trillion accumulated over the next two decades for the four metals alone. This could rival the estimated value of oil production in a net-zero emissions scenario over that same period, making the four metals macro-relevant for inflation, trade, and output, and providing significant windfalls to commodity producers.     

Estimated cumulative real revenue for the global production of selected energy transition metals, 2021-40 (billions of 2020 US dollars)

Source: Eurasia Review

Long-Term Oil Price Outlook

Commodity experts at Standard Chartered have released their latest commodities update wherein they expect a medium-term deceleration in both demand growth and non-OPEC supply growth. 

Stanchart has projected demand to average 106.5 million barrels per day (mb/d) in 2026, based on announced and likely government policies, which would leave demand well above the International Energy Agency (IEA) net-zero emission path, in which demand falls to 78.4mb/d by 2030.

Further, the analysts say all the incremental 5.2mb/d of demand from 2023 to 2026 is likely to come from non-OECD countries, with OECD demand forecast to average 45.8mb/d in 2026, 1.9mb/d less than in 2019 and 4.3mb/d below its 2005 peak.

The analysts say 2022 and 2023 are likely to be more of a challenge for OPEC than 2024 and beyond. The increase in the call on OPEC across 2022 and 2023 is put at 1.4mb/d, suggesting that a return of further Iranian volumes would leave little space for increases elsewhere in OPEC if it occurs before 2024. Luckily for the oil bulls, the outlook becomes tighter after 2023, with the call on OPEC increasing by 3.2mb/d from 2023 to 2026.

Stanchart has raised its 2022 Brent forecast USD 8/bbl to USD 75/bbl and its 2023 Brent forecast USD 17/bbl to USD 77/bbl.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on January 13 2022 said:
    I project that crude oil prices will be on upward trajectory for the next five years with Brent crude price hitting $110-$120 a barrel between now and 2027 amid real signs of a supercycle.

    Oil prices will continue to be underpinned by robust global economy and global oil demand, declining international oil inventories, widening supply deficit, question marks about the real OPEC+ spare capacity and declining global concerns about Omicron variant and COVID at large.

    The excessive market demand for commodities particularly copper normally pushes crude oil demand in the same direction.

    However, question marks about OPEC+ spare production capacity are acting as a bullish factor pushing oil prices upward. Once OPEC+ has recovered all the production cuts it made in April 2020 at the height of the pandemic, it will end up with spare capacity of no more than 2.0 million barrels a day (mbd) according to my estimates.

    It normally takes multi-billion investments and up to five years to increase production by a meaningful margin. But with Saudi Arabia, Iraq, UAE, Russia and Kuwait embarking on capacity expansion, OPEC+ capacity could rise by an additional 2.20 mbd in five years’ time with Iraq contributing 700,000 barrels a day (b/d), UAE 450,000 b/d, Russia 400,000 b/d, Saudi Arabia 400,000 b/d and Kuwait 250,000 b/d.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bill Simpson on January 15 2022 said:
    Oil will still be black gold for another 30 years.

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