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WCU: Stalling growth no hindrance for higher commodity prices

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Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector is showing little sign of global growth worries having a negative impact on prices. In fact during the past week, the Bloomberg Commodity Sport index reached a fresh record high, up 38% on the year, with most of the gains being driven by a surging crude oil, gas and fuel prices. Under normal circumstances, elevated commodity prices tend to drive a response from producers in the shape of rising production, which eventually would support lower prices through increased supply. In this we highlight the reason why this time may be different

The commodity sector is showing little sign of global growth and demand worries having a negative impact on prices. In addition, over the past week, the Bloomberg Commodity Sport index – which tracks a basket of major commodities – reached a fresh record high, up 38% on the year. The sectors doing the heavy lifting remain energy and grains, having delivered year-to-date gains of 102% and 33% respectively. The industrial metal sector, which slumped by 25% between March and April when Covid-19 outbreaks locked down parts of the Chinese economy, has made a tentative attempt to recover in recent weeks. However, news of fresh lockdowns in Shanghai highlights the risk of a slower-than-expected recovery in demand from the world’s biggest consumer of metals.

Surging demand for consumer goods during the 2020 to 2021 lockdown period, supported by government handouts and rock bottom interest rates, helped drain the supply of many key commodities from metals to energy. In addition, we have seen years of plenty supply of key food commodities reverse with adverse weather and the war in Ukraine turbocharging prices led by wheat and edible oils. These, and other developments, have seen inflation surge to the highest levels in 40 years. As a result, central banks across the world are now hiking rates in order to reduce liquidity and drive down prices through lower activity.


The result is a challenged outlook for global growth – even in the US where a high frequency GDP tracker monitored by the Federal Reserve is now pointing towards increased risk of zero growth in the second half, potentially resulting in a technical recession which occurs when growth turns negative in two consecutive quarters. In addition, the World Bank this past week slashed global growth, warning of 1970’s-style stagflation.

These developments have naturally raised the question of when the phenomenal rally in commodities since the 2020 Covid bottom will pause. Under normal circumstances, elevated commodity prices tend to drive a response from producers in the shape of rising production, which eventually would support lower prices through increased supply. In addition, the prospect of growth and demand slowing would normally solve the problem of high prices.

The reasons why, in our opinion, we may not see these market reactions play out are driven by several factors – the most important being a reduced focus on investment from major producers of energy and metals. Other factors include sectors seeing some producers close to being maxed out on production, demand towards the green transformation, ESG investor and lending restrictions and increased focus on reducing dependence on Russia – a country increasingly seen as untrustworthy.

Crude oil trades near a three-month high, with the front month contracts of WTI and Brent both trading above $120 per barrel. The recent upside extension is being driven by China’s latest attempt to reopen major cities following Covid-19 lockdowns, a development which is likely to increase demand from the world’s biggest importer at a time where the global supply chains remain stretched due to the war in Ukraine. In addition, the OPEC Secretary-General said most members are ‘maxed out’, a comment that helps explain why the recent OPEC+ decision to raise production by 50% was ignored by the market in the knowledge the group (already 2.5 million barrel per day below target) will continue to struggle raising production.

In its monthly Short-Term Energy Outlook, the US Energy Information Administration left 2022 production unchanged at 11.91m b/d, in line with current levels, while boosting next year by 120k b/d to 12.97m b/d. In addition, they warned Russia’s production could drop by 18% by the end of next year. Refineries across the world are running at close to capacity to replace sanctioned barrels from Russia, and with supply being this tight, prices will likely need to go higher in order to kill demand, thereby supporting the painful process towards balancing the market.

Source: Saxo Group

Natural gas remains one of the most volatile futures markets, and while some sort of nervous stability has emerged in the European market, the US gas market remains highly volatile with strong hot weather-related demand and strong export growth not being met by rising production. As a result, the price of the Henry Hub gas contract reached a 13-year high this past week before temporarily suffering a sharp correction. This, as after a fire at an LNG export terminal in Quintana, Texas, briefly lowered prices for the fuel in the US while lifting Dutch TTF gas prices from a three-month low.

The Freeport facility, one of seven US facilities exporting gas to overseas markets, will remain closed for at least three weeks, thereby halting close to 20% of total US LNG export capacity – the bulk of which goes to hungry buyers in Europe where the race is on the reduce dependency on Russian supplies.


Gold, rangebound for more than a month traded softer after the US published another strong inflation print at 8.6%, a fresh 40-year high, from 8.3% expected, and after the ECB said it would start raising rates from July, thereby joining other central banks in combating rising inflation. However, the less hawkish outcome of the meeting helped send the euro lower versus the dollar, thereby adding downward pressure on bullion.

The prospect of rising US treasury yields, and with that a stronger dollar, remains the main reason why some investors are reluctant to invest in gold as it reduces its ability to act as a hedge against inflation and the ongoing turmoil in bonds and stocks. We maintain the view that gold has – at least on a relative basis – been doing very well this year, especially for non-dollar-based investors. While gold in euros has returned around 8%, an investment in a broad EU government bond ETF or the Euro Stoxx50 stock index would have set you back by around 13%. A dollar-based investor has seen a relatively small 1% return in gold while the S&P 500 is down 15% and an ETF tracking long-dated bonds has lost a whopping 23%.

We maintain a bullish view on gold and silver, once industrial metals, as we believe they will, find renewed strength. The main reason being the rising risk of a central bank policy mistake raising interest to the point where economic growth stalls.

For now, gold remains stuck in a range with leveraged traders in futures and investors in ETF’s currently showing no clear conviction with positions in both having been rangebound for the past month. For that to change, we need to see a clear break above $1870 – the key level of resistance.

Commodity related stocks lead our Saxo equity themed baskets
The 20 companies in our commodity basket continues to show a high degree of immunity from the storm raging across the equity market. Previous investor darling themes such as Crypto & Blockchain, E-commerce and Bubble stocks have all seen year-to-date declines of more than 45%, and it highlights the importance of holding exposure towards the so-called old economy where tight supply and high prices are likely to deliver a high level of profitability. 



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