Every oil analyst I know is bullish but they always are! The oil chart speaks for itself. The break of support suggests a relatively swift move to $70 and, assuming recession takes hold in H1, 2023, probably lower still.
It’s odds-on that base metals and bulks will eventually follow. As Bloomie notes:
What Stops Hot Commodities in 2022 From Turning Cold in 2023?
Plunging global liquidity, an inverted yield curve and commodity-performance history point to increasing risks of severe economic contraction and demand destruction in 2023. It may be a question of what would stop this trajectory, and it doesn’t appear to be stimulus from the Fed, until or unless prices drop.
Hot Commodities in 2022 Risk Being Too Cold in 2023.
There may be little stop the commodity pendulum from swinging downward in 2023.
The shift toward recession is indicated by the average yield on sovereign debt maturing in 10 years or more falling below that of securities due in one-to-three years, based on Bloomberg Global Aggregate bond subindexes. Commodities normally get too cold in recessions, especially after a too-hot period that may have spurred central banks to tighten more aggressively. The history of the Bloomberg Commodity Spot Index reaching a 50% premium to its 100-week moving average as it did in 1H shows that about 20% is a standard discount in the aftermath, which helps reset supply and demand.
Bullish potential may come from China reopening, but the country faces a property crisis, and leadership is bending more toward the North Korea model vs. Singapore.
Elevated Commodities vs. Recession and Reversion.
The Bloomberg Commodity Spot Index (BCOM) has never rallied at a similar velocity as in 2022 without an ensuing US recession, and that may play out in 2023. The index stretched about 70% above its 60-month moving average in 1H, and our graphic shows that the only period since 1960 that the index didn’t put in a substantial peak upon reaching such heights was 1973-74. Repercussions of further gains that would fuel inflation and more central bank tightening vs. the propensity to revert lower suggest commodity prices may be inclined toward losses in 2023.
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Trust the yield curve over sell-side research. It is screaming recession in the US, which will spread worldwide despite China and, increasingly so in Australia.
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