I had the opportunity to speak with Andrew Geoghean and discuss the current situation with respect to some key commodities. Please click on the link below to access and watch the interview:
YTD – oil is up 16%, and major oil stocks are also up YTD – WPL by 6%, STO by 8%.
Oil prices have settled comfortably around the $90 a barrel for the first time since November, and up 30% since June, representing the latest milestone in a surge driven by output cuts from Saudi Arabia and Russia amid record global consumption. The International Energy Agency (IEA) this past week warned that continued supply cuts by the two OPEC+ leaders are likely to create a “significant supply shortfall” 1.2 million barrels a day on average during the second half. That report came a day after OPEC said the market is facing a deficit of more than 3 million barrels a day next quarter, potentially the biggest in more than a decade. Meanwhile, demand in the US and China, the top two consumers, remains robust.
On the supply side, the situation is tightening, with top OPEC+ producers Saudi Arabia and Russia extending 1.3 million barrel per day output cuts through to year’s-end. U.S. crude production has also flattened in recent months on a 17% drop in drilling rigs in the past 52 weeks. US crude inventories at the nation’s biggest storage hub at Cushing, Oklahoma, dropped again last week, falling to their lowest level since December. And we’ve seen US oil production fall for a third consecutive month. The IEA forecasts that the market will tip into a significant supply deficit during the second half of this year, with demand eclipsing supply by.
Another positive indicator for crude oil prices is that hedge funds have boosted their long position on Brent and US crude to a 15-month high. The positioning by hedge funds marks a major turnaround from the gloom of the first half of the year, when the group’s positioning was the most bearish in about a decade. However, with prices soaring by more than 30% since late June, traders are bracing for a potential pullback as technical gauges such as the relative strength index show futures near overbought territory, with potential near-term resistance at around $90 a barrel.
YTD – spot gold is up 7% in US terms and up 12% in A$ terms.
The longer-term trend in gold remains intact, having been in a long-term uptrend since its low of US$255 in August 1999, making it close to 25 years of overall price growth – where it currently sits comfortably above $1900 – an increase of 7.5 times. In A$ terms the increase has been even greater, from a low of $386 to a current price around $3000 – an increase of 7.7 times.
The key factor in my mind that has driven gold over the past couple of decades has been the correlation with the growth of debt worldwide, which has skyrocketed, especially in the post-covid and post-GFC environments. In the US, servicing debt repayments now represents 2.5% of GDP and growing, so by 2028 it will exceed defence spending. This growth in debt has led to a decline in the value of virtually all currencies, including the US dollar. Central banks recognise this, and it’s no surprise that they have turned from being significant net sellers of gold 25 years ago, to strong net buyers of gold now. In fact, they have been buying at record levels in recent years.
Despite the strength in the gold price, gold equities have struggled, which is mainly due to investor caution about being in the equity market. And equities are just one way for investors to get exposure to gold, the others being ETFs and physical gold, which have become increasingly popular.
YTD – Iron Ore price is up 10%, but major miners exposed to iron ore are lagging – BHP -3%, RIO flat, FMG -0.5% This tells us that investors are still staying away from the equity market.
The spot price of iron ore has climbed above $122 a tonne to a five-month high, largely due to improved sentiment with respect to China, mainly additional stimulus and hopes that China’s beleaguered property sector might be starting to turn around. At the same time, we’ve seen strong iron ore import volumes into China, as steel mills look to build inventories.
On the downside, steel mills may be forced to limit output in the coming months, firstly to comply with winter pollution requirements and also to comply with China’s unofficial policy that steel output should not grow this year. We might also see Chinese authorities taking steps to intervene, should iron ore prices continue to rise.
The best performing major commodity so far this year is uranium, with the spot price up by 38% to $66/lb, which is a record. The graphic shows the uranium spot price up 142% over the past five years.
Uranium’s impressive performance, based on rising demand and shrinking stockpiles, has set it apart from many other commodities, which have faced declines due to the strengthening US dollar and China’s softening economy. Decade-high uranium contracting levels by utilities, coupled with supply disruptions and risks, have helped to create a robust demand market.
Importantly, uranium fundamentals are the least exposed to China’s economic cycle and secular and cyclical challenges. On the demand side, an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds, are boosting demand. Consequently, utilities are accelerating their purchases under long-term agreements, which are on track to exceed last year’s 10-year high – currently at 107MM lbs YTD. Significantly too, real demand in the form of increased contracting from utilities, as opposed to financial entities, has been the primary driver for the rise in the uranium price year to date.
Primary uranium mine supply is significantly trailing demand, with a cumulative forecast supply shortfall of approximately 1.5 billion pounds by 2040. The industry is recognizing the need for more uranium mining. Even traditionally anti-nuclear Sweden has revealed intentions to revoke its uranium mining ban and substantially amplify its nuclear output.