The rise in Brent crude oil prices since November has some notable figures in global commodity markets heralding the arrival of a “supercycle.”
This comes as optimism around COVID-19 vaccines has supported the demand outlook and OPEC+ has been managing output, even if some have questioned whether this surge in prices is warranted with the world still in the midst of a pandemic.
The rally in the broad spectrum of commodities assessed by S&P Global Platts has prompted heavyweights to outline their reasoning for the supercycle – a protracted rise in key prices.
“What is the definition of commodity supercycle? It’s a structural upward shift in demand…and we have a structural upward shift in demand occurring,” Jeff Currie, head of commodities research at Goldman Sachs told Platts in a recent interview.
In early 2021 copper and iron ore, vital industrial products, were close to highs not seen since early last decade, and the LNG benchmark, Platts JKM, reached unprecedented levels, boosted by economic stimulus spending, Chinese demand and a weaker dollar.
Some $14 trillion was spent on fiscal packages around the globe last year, according to the International Monetary Fund, and for much of 2020 there was a strong inverse correlation between the US currency and the S&P GSCI, a benchmark for investment in the commodity market.
A weaker dollar makes commodities cheaper for holders of other currencies.
“A key driving factor is the healthy growth being observed in the East, led by China, where, unlike the West, we see demand has already recovered to above 2020 levels,” Midgley said.
Stock building and an infrastructure boom are among the factors that have led to strong buying across commodities.
Each individual commodity has its own story to tell and while oil has been dragged back by moribund jet fuel demand, it has also been propelled higher by the 1 million b/d production cut by Saudi Arabia on top of OPEC+ reductions and improvements in global mobility.
Platts Analytics sees Dated Brent prices as fundamentally in the mid-$50/b range towards end-2021. However, it notes “the strength in the reflation trade, which has buoyed all risk assets in recent months, could move the set point of that trend higher/lower.”
Indeed, the power of fiscal spending on commodities should not be downplayed.
Oil demand is relatively price inelastic and much more responsive to shifts in trend regarding income – and by extension – fiscal stimulus, tax incentives and other economic drivers. As such, the pace of economic recovery remains critical.
The global economy has been recovering from its lowest point, seen last April, but is not likely to reach 2019 levels before the third quarter of 2021.
This article was published in the February 2021 issue of the S&P Global Platts Insight Magazine. View the full issue here.