RALLY: The broad-based Bloomberg commodity index has rallied 70% from its low 27 months ago. The average commodity rally has been 120% over 30 months, implying room for more. Analysis of seven major commodities (see chart) shows only oil exceeded an average rally. Rallies are normally ended by recessions, which are not on the horizon. We see ‘high-for-longer’ oil (OIL and XLE for equities) prices, even at a politically sensitive $85/bbl. Demand is recovering, supply tight, inflation high, and USD off highs.
CONTEXT: We use 50-years of World Bank data to look at the trough-to-peak magnitude and length of the average commodity price rally. This supports our fundamental view that commodities can move higher. Energy and metals tend to move together. They have similar economic growth drivers, are often close substitutes, and energy is a key production input of some. This is less the case for ag and precious metals.
OUTLOOK: Demand is strong with developed market GDP growth near twice average levels this year, and no.1 importer China’s economy bottoming. Supply is tight after a decade of under-investment and ESG-concerns now dampening energy flows. Stubborn inflation and a USD stabilization are further supports. Commodities are a small equity sector, where a little money makes a big difference, but some markets are highly exposed.
All data, figures & charts are valid as of 17/01/2022