In this Q&A, we sat down with Bruce Liegel for a deep dive on what lies ahead for commodities and whether there is a looming "supercycle".
Hedder: There are talks of a looming supercycle. Can you explain what the term means and weigh in with your thoughts?
The macro picture
Liegel: So a commodity supercycle is kind of a term where commodity prices go ballistic. We've seen two commodity super cycles in the last 15 years. The first one was roughly during 2006 to 2008. Then we had another supercycle in 2022. And really, people focus on oil more than anything. When oil gets to $120, $130, that's kind of considered a supercycle. Same thing with copper prices doubling. So typically when commodity prices double or triple is when we're talking about these super cycles.
Now, we have had two super cycles in the last 20 years. Very rarely will we have another third supercycle so quickly. Let's just call it a bull market in commodities rather than a supercycle. I think the next bull market in commodities is a couple years away and there's a couple reasons for that.
Obviously, we're seeing the unrest in the Middle East, and this has caused oil prices to shoot up $3-4 on this news. No one knows geopolitically what's going to happen over the next two to three weeks. We don't know for sure how to respond to that, only knowing that there's a lot of uncertainty, which increases volatility, which causes commodity prices generally to go higher especially on the oil sector, and it causes equities to typically sell off.
But besides the geopolitical issues, the framework is set up now, especially with China growth slowing now. We've been talking about a recession in the US now for over a year and we still don't have one. The most recent non-farm payroll data is still extremely positive although when you dig into the data, it's really a lot more part-time jobs putting into the economy than full-time. We're actually losing full-time jobs. So there is some underneath shifting in the sands for the economic growth in the US. Going forward on commodities: we just saw a huge spike in prices, and it typically takes two to three years for retracement in prices before we can get really excited.
If we focus on oil, there's a lot of interesting things going on in oil besides the geopolitical. The Saudis and the Russians have put together an agreement inside OPEC to curtail supply that has caused prices to go higher. The other big issue is in the US where production and fracking have gotten a bad rep. The investment into those sectors has really dropped off over the last three to five years, and I don't see that coming back.
So what's happening is less oil wells are getting drilled. The drilled uncompleted wells are really falling off, especially in the Permian. For example, three or four years ago, the Permian had over 3,500 drilled wells that weren't quite completed. It's now below a thousand. And what that means is that when you're drilling, they drill these wells as quickly as they can, they cap them, and they go and they drill the next well. And then they build the infrastructure later to take the supply away. That has really dropped off. That was a surplus that was sitting over the market that was keeping prices capped. Now that these drilled uncompleted wells have kind of gone away and there are not enough wells being drilled now, we don't have the cushion that we had in fracking that we had five years ago.
This means there’s a supply demand imbalance now in the US. At the same time, the Saudis are cutting supply. All this is going at the same time where you're transitioning away from an oil based economy - whether it's electric cars, batteries, solar hydrogen. These transitions can be very bumpy and it's going to be very volatile. This supply demand imbalance is what's going to cause the next supercycle or higher prices in oil over the next five years.
You're also going to see this supply demand imbalance in a lot of base metals that are used in the supply of a lot of these EV batteries, solar – whether you're talking about copper, whether you're talking about some of the base metals that are used in this or some of the rare metals that are used. All of these are going to be in short supply if we truly try to speed up this transition into this new renewable world.
Then on the other side of it, you have bull markets in a lot of these food commodities like sugar and coffee. Sugar is used in ethanol in Brazil, corn is used in ethanol in the US. We've got a pretty tight supply demand balance on a lot of these commodities. So as an El Nino developing in South America, what could cause issues with growing conditions not only in the US, but Brazil, Australia, Asia. So you've got a lot of things that are underneath that could cause markets to really go higher later. But I think for this year into next year, I'm still a more negative commodities than I am bullish. But the supercycle isn't too far off from where we are today.
Hedder: How correlated are commodities with inflation?
Liegel: Commodities are very highly correlated with inflation, and commodities are initially the driver of inflation. Now, you could also argue that wage pressure causes inflation. There is also an issue with global demographics. But basically, all of these things are causing a tighter job market. We're seeing that in the US where we've got a very low unemployment rate. We're also seeing that in Europe and South America. We're seeing a tight labor market due to these demographic issues. This is causing inflation to grow from where it has been the last 20 years. And at the same time, you've got China less a player going forward because of their aging and demographic issues also. So all this is setting up for this supercycle in higher inflation and higher interest rates over the next 15 to 20 years.
So that's another supercycle that's more like a generational change that I often talk about. Things have changed and that changed two years ago when we broke out of these long historical downtrends. Interest rates have been basically going lower since 1980. That has now changed. Inflation was going down since 1980, and this was a global thing, not just US. All of that is now flipped. We have to start thinking about higher interest rates and higher inflation over the next 10 to 15 years. We just saw the first phase of this. If I'm right, there's three phases of this cycle. We're now in a respite where inflation has come down. Interest rates are probably getting close to peaking here at around 5% on the 10-year in the US. So over the next year or two, we should see interest rates come down a little bit. But then the next cycle will start up again, and the next cycle will be more impactful than the first cycle.