As investors pile into commodities and some banks raise the price targets on everything from base metals to oil and agricultural products, economists are cautioning that the current bull market should not be confused with a ‘supercycle’. “With things as volatile and uncertain as they are right now, saying a blanket ‘commodities supercycle’ is a little premature,” said Rory Johnston, managing director and market economist at Price Street, a quantitative research firm developing analytical tools for the financial industry, in Toronto.

Citigroup’s managing director and global head of commodities research Ed Morse said there have been two spectacular surges in commodity prices — in the 1970s and in the 2000s — which led to massive, multi-year increase in commodity prices and especially in the price of oil. “What was true about those supercycles and is not at all true now is that virtually all commodities reached a cyclical trough at exactly the same time,” Morse said in an interview with the Financial Post, adding previous commodity surges were characterized by a lack of investment and a lack of inventory.

This time around, Morse said, there may be a lack of investment currently but “the material is abundant” for multiple commodities including the inputs used for making steel and for oil, thanks to the rise of horizontal drilling for oil in North America.

Gleeful investors have watched as a broad basket of commodities have risen sharply and the Brent oil price benchmark hit a one-year high on February 8, when it traded up 2% to finish the day at US$60.56 per barrel — the first time crude surpassed US$60 per barrel since Jan. 2020. In addition to crude, multiple base metals have touched multi-year highs in recent weeks including copper, and iron ore. The broad S&P GCSI Commodity Index, comprising 28 investable commodities, has risen 10% this year alone.

A slew of banks have begun using the term “commodity supercycle” to describe the current market dynamics, which are largely driven by rebounding demand in China, where an economic rebound following its COVID-19 lockdowns and steelmaking and manufacturing has driven price appreciation. But economists warn the term is too exuberant a term for what is expected to be a two-year bull market for commodities that could still be derailed by more shutdowns from the outbreak of COVID-19 variants.

Price Street’s Johnston said much of the commodity hype has followed a bullish thesis that New York investment bank Goldman Sachs published late last year. Goldman Sachs’ commodities research team called for a bull market in commodities in October 2020 and has been publishing notes to support its “policy-driven structural rise in commodity demand thesis” since that time, which is underpinned in part by a “globally synchronized green wave of stimulus” spending that will drive commodity prices higher. The bank noted that its commodities basket is up 24% since Nov. 2020.

Investors have been parking their funds in the sector, encouraged by the promise of the global economy reopening. A research note from Citigroup Global Markets shows investors poured US$4.6 billion into commodity indices and linked ETFs during the week of February 1, and cumulative inflows this year total US$12.6 billion, bringing total assets under management to a record high of US$654 billion.

Similarly, London-based Capital Economics published a report on February 8 that green stimulus spending and an economic recovery will not benefit all base metals evenly and, “We don’t think a commodities-wide supercycle is on the cards. The latest rally in commodity prices is reminiscent of 2009-2010 in that it has been fuelled by strong Chinese demand. We expect that this is likely to run out of steam this year, as stimulus is withdrawn, and that prices will fall back,” Capital Economics’ chief commodities economist Caroline Bain wrote.

Each individual commodity requires should be evaluated on its own, according to Scotiabank Economics senior economist Marc Desormeaux. “In terms of broad increases in commodity pricing, that is something that we’ve built into our forecast,” Desormeaux said in an interview.

Desormeaux published his most recent Scotiabank Commodity Price Index on Jan. 28 and expects Brent oil benchmark prices to rise from an average price of US$39 per barrel in 2020 to US$51 per barrel this year and US$57 per barrel next year. He also forecast higher average prices for natural gas, copper, nickel, zinc and aluminum in each of the next two years, though iron ore and gold prices are expected to level off in 2021.

The Canadian dollar has also edged higher against U.S. dollar on February 8, on the back of surging oil prices and as data showed speculators raising bullish bets on the currency. The loonie was trading 0.1% higher at 1.2738 to the greenback, or 78.49 U.S. cents, having touched its strongest level since Jan. 27 at 1.2731, Reuters reported.

Source: Financial Post