Clearly, Goldman Sachs is still too long commodities:
Growing scarcity across physical markets. Since last October, policymaker and investor focus has remained on the vaccine-driven demand recovery from the deepest recession on record. Yet today, physical goods demand has reached such high levels — above pre-pandemic trends in all but oil — that the system is becoming increasingly constrained in its ability to supply these goods. Now with the pandemic inventory glut run down, these markets are becoming increasingly exposed to any type of supply disruption or unexpected demand increase. The lower the inventory cover, the bigger the risk and the larger the scarcity premium in prices when one of these events materializes – just as we are seeing in European gas and power today.
The consumer-led recovery accelerated the revenge of the old economy. It is important to emphasize that most of these shortages, outside of labour issues, have very little to do with covid. In fact, the seeds were sown following the financial crisis in 2008 when long-cycle ‘old economy’ capex collapsed in favor of short-cycle ‘new-economy’ capex – a fact we highlighted in 2019. To incentivize long-cycle capex, physical goods prices will need to significantly overshoot to the upside to compensate for the growing risks involved in long-cycle capex projects. As commodity markets are unable to react to the first leg higher in prices through greater supply, once inventories are exhausted, like in European gas today, demand destruction is the only option to rebalance markets which requires sharply higher prices to curtail demand in line with supply.
