Commodities Are Screaming 'Recession,' So Why Are Analysts Still Holding On?
The window for bullish commodity price targets to be realized is closing rapidly.
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As each day goes by, the window gets narrower and narrower for the various sell-side houses’ bullish commodity price targets to be realized for this year.
2024 was meant to be the year where every analyst wanted to be on the right side of the technology versus energy/commodity trade unwind, and each started by pushing how "cheap" they were as the Fed was expected to cut rates, which would naturally lead to higher prices. Even the renowned Jeff Currie back in May called for copper to be one of the best investment themes in his career when it was trading close to $11,000 per metric ton. Since then, it has only been falling, now down 20% since, and it continues to be weak. Oil is yet another example of stale analysis calling for $125 per barrel (BBL) — let alone the $200-plus called back when Russia invaded Ukraine. Today, brent can hardly catch a bid around $70 per BBL. It has been the same price since December 2021!
Most analysts get demand wrong as they assume it is linear and things will always get better and pick up, when most times, it is demand that surprises both on the upside and downside. Everyone fixated on how tight the copper supply was or how oil would be supported as OPEC+ kept back about 5 million BPD of oil out of the market since COVID, so prices could only go up, right? Of course, this also means that everyone assumes China will be growing at 5%-plus GDP and that the U.S. will enter the roaring 2020s as it magically keeps the engine running post all the fiscal stimulus spent into and out of COVID.
OPEC is still holding onto the fact that they expect 2 million BPD demand growth, of which China will magically grow by 700,000 BPD this year, when in fact, Chinese demand is down 300,000-plus BPD since the start of the year!
Rather than try to understand what is driving demand growth, most stale analysts are using the old play book of China coming back and printing yet more trillions to boost their demand and get GDP up. This is despite President Xi Jinping constantly saying that his priority is not growth but the consumer. The economy has been deleveraging for the past few years and it cannot afford to keep printing more debt, as that is what got it in trouble in the first place. They have the resolve to face the short-term pain to be positioned for the long-term gain.
Jerome Powell could learn a thing or two from President Xi, as the U.S. has its own woes, its national debt inches higher every day and today, the budget deficit spending is in excess of 7%, with tax receipts unable to keep up with the U.S. spending. The only answer is to print yet more debt, but at these higher rates, it is all going to pay down interest expense!
So, where may I ask, is this magical GDP recovery to come from? All faith is built into the AI boom as productivity is meant to be the answer to all their worries. It may well be so, but even the internet took a good few years and a bubble burst before it got to where it is today.
Commodities are all about demand and supply balances. Today, supply is known but demand keeps disappointing, and as more and more supply builds up, prices keep falling. Businesses are suffering, consumers' COVID savings are tapped out. Today, the labor market is showing signs of cracking and we are about to enter a U.S. election with an uncertain policy.
After printing trillions to save the economy post COVID, all that growth is now rolling over. Today, national debt is close to $38 trillion and we have not even seen the start of a crisis... or have we? There is a huge disconnect in what the equity analysts are hoping for and what actual markets are pricing in. Both can’t be right.
At the time of publication, Bengali had no positions in any securities mentioned.
