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Recession fears fail to curb commodity boom

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Earlier this week, brent oil dropped below $100 a barrel for the first time in months. Same way West Texas Intermediate. Copper fell to its lowest level in nearly two years. It looks like inflation has done its evil deed. A recession was looming, and demand for goods was about to fall. And then both oil and copper recovered. This lasted only one day, although the price of copper fluctuated depending on the flow of news from China and the outlook for its economy for the rest of the year and the medium term. The latest bounce in copper prices was, in fact, attributed some to the possibility that the Chinese government will provide additional stimulus to keep the economy at a healthy pace.

However, the recovery in oil prices was easy to predict, despite the notorious uncertainty in the oil markets. And the reason it was easy to foresee was because of fundamental principles. Whatever happens in the speculative market, one cannot ignore the fact that the world’s oil supply is limited, while demand is very lively and continues to grow.

The Financial Times has made this quite clear. In an article published earlier this week on falling commodity prices, the authors said that “hedge funds have played a central role in the recent decline in commodity prices by selling long or positive positions in certain commodities and often replacing them with bearish bets.”

If in 2020 and 2021 the main threat of 2020 and 2021 was Covid, then this year there are two of them: Vladimir Putin in Russia and a recession. And it increasingly looks like the latter is overtaking the former in terms of intimidating value.

Recession talk is all over the news. Central banks are being criticized for tightening monetary policy too quickly, accelerating the recession. It was only a matter of time before hedge funds decided to play it safe and start selling. But, and this is important, it has nothing to do with the basics. The fundamentals explain why oil rose the day after it fell.

Wells Fargo recently stressed that market price movements have nothing to do with actual supply and demand. The United States, the world’s largest consumer of oil, is already in crisis, according to the bank’s investment strategy department. recession.

“There is a technical component to the recession, but there is also a significant deterioration in consumption and employment,” Sameer Samana, senior global strategist at Wells Fargo Investment Institute, told Bloomberg this week. “The technical part is the first half of the story, and the brunt of unemployment and consumption is the second half,” Samana added.

Inflation, according to analysts at Wells Fargo, turned out to be much faster and wider than originally expected, as a result, consumer sentiment has worsened, and businesses are changing their spending plans. But demand for oil is still strong, as is the case around the world, even as some analysts predict a decline. According to Citi’s Ed Morse, for example, “almost everyone lowered their demand expectations for the year.” Demand “just didn’t grow on an empirical basis to the extent that people expected,” Morse. said Bloomberg TV.

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Demand may not be growing as expected – which would be a miracle at these prices – but supply is also not growing, which is probably the reason for Saudi Arabia’s latest price. to travel on foot for Asian buyers to near-record levels. Sellers are reluctant to raise prices when they expect demand for their goods to decrease.

Not surprisingly, therefore, Goldman Sachs, unlike Citi, He speaks this oil could still hit $140 a barrel, even with all the recessionary fears hovering around the market. “$140 is still our base case because, unlike stocks, which are preemptive assets, commodities need to address today’s supply and demand mismatches,” Goldman’s Damien Curvalin told CNBC this week.

These price projections, from both Citi and Goldman, do not take into account supply disruptions – the same supply disruptions that just a couple of months ago, even a month ago, kept the markets captive. The disruptions are expected to be mainly caused by Russian oil exports, but this may already be priced in, with about six months left before the European Union’s oil embargo comes into effect.

Meanwhile, there are few alternatives to these supplies for Europe simply because of the scale of Russian oil exports to the continent. This is likely to continue to be bullish on oil prices, whatever the economic trends. Even if a recession reduces demand for oil, it will take a long time for the real drop in demand, which Citi says could send the price of oil down to $65 a barrel, to take some time.

Recession fears are well founded. There is little doubt about this. However, the fundamentals of commodities, not only oil and gas, but also agricultural commodities and metals, have not changed just because hedge funds suddenly began to worry about a recession. They are still tight. And this sets a price floor that will remain at that level as long as supply remains tight.

Irina Slav for Oilprice.com

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