If you want to know how up against it the Fed is in its fight to bring commodity prices under control today then look no further than the latest from Goldman:
Hoarding tees up the next leg higher. In the past two months, hoarding by consumers has concealed just how weak commodity demand has been. From early April to mid May, commodity fundamentals were effectively pushed into recession as China imposed the broadest COVID lockdowns since 2020. By our estimates, global oil demand fell 2.5% while onshore copper demand fell 10% as Chinese PMIs saw their worst print since February 2020. In a similar vein, Russian supply came in above our expectations (0.7mn/b vs 1.7mn/d), driving inventory builds across the complex. Despite this fundamental softening, commodity prices – and time spreads – have held up, with oil at $120/bbl, copper at $9,550/t and corn at $7.75/bu. To square this pricing paradox, investors must understand how commodity market behavior shifts when they enter into periods of prolonged scarcity. As we saw in gasoline markets in 2006, when inventories appear after a period of scarcity and volatile prices, market participants – from refiners to manufacturers – begin to hoard the spare stocks as a hedge against future scarcity. This creates backwardated markets despite building inventories and signals a strong set up for the next leg higher, as Chinese stimulus pressures continue to build and consumers continue their rotation toward higher travel and leisure spending. Today, we are seeing this across commodities – energy consumers in Europe and China are building precautionary inventories, Chinese manufacturers continue to buy metal to catch up on lost production this summer, while governments look to restrict agricultural exports in the hope of taming domestic inflation.
In many of the commodities that I follow we have already seen this pulse. It was the cause of the scarcity, not the other way around.
