Oil could top $100 as commodities boom shifts away from China, says top economist

The commodities rally in the first six months of the year was driven in large part by China. It was “goods-intensive and it was metals-intensive,” Rahim told MarketWatch in a wide-ranging phone interview on Wednesday. “And now it is U.S.-EU-intensive, it is services-intensive and oil intensive.”

Trafigura Group Pte. Ltd., based in Switzerland, is the world’s largest private metals trader and the second largest private oil trader.

The first half of the year saw metals prices scream higher, with moves attributed to demand from China, supply bottlenecks, and years of underinvestment in output. Steel futures were among the first half’s top performers, while iron ore, copper and other metals also soared.

Commodities Corner: Halfway through the year, steel, ethanol lead the rise in commodities prices

But it was a broad-based rally. The S&P GSCI Index SPGSCI, +1.64%, which tracks 24 exchange-traded commodities, was up 31.1% in the year to date, according to Dow Jones Market Data, on pace for its best first-half performance since 2008 when it gained 41.4%.

Commodities indexes are largely outpacing their equity counterparts, though major stock indexes have also recently hit or continue to trade near all-time highs. In the year’s first-half, the Dow Jones Industrial Average DJIA, +0.24% rose 12.7%, the S&P 500 SPX, +0.30% 14.4%, and the Nasdaq Composite COMP, +0.07% 12.5%.

The commodity rally comes after a multiyear slump that bottomed out last year as the pandemic forced the global economy into a deep recession.

Some commodities markets have come off the boil. Lumber futures LB00, +0.78% have dropped nearly 60% from their 2021 high as tight supplies forced a slowdown in house-building activity, but lumber remains up nearly 60% over the last 12 months. Copper is 12% off its 2021 high, but still up nearly 57% over the last 12 months.

While the copper rally has slowed, “oil has the bit between its teeth” and is off to the races, Rahim said, in an illustration of the shifting demand dynamics.

Oil is trading near its highest levels since October 2018, with global benchmark Brent crude BRN00, +2.40% up more than 40% in the year to date, while its U.S. counterpart, West Texas Intermediate crude CL00, +3.14% CL.1, +3.14%, is up more than 50%. Both grades have rallied more than 80% over the last 12 months.

And investors may recall that a WTI contract made history in April 2020 by trading — and closing — at a negative price on the eve of its expiration.

China has taken steps in recent months to dampen the rise in commodities prices, particularly metals, by releasing supplies from strategic reserves, vowing a crackdown on speculators and other tactics.

Those measures have had an effect, particularly since China accounts for around 50% of metals demand, Rahim said. While Chinese demand is also an important component of the crude-oil market, at around 12% of the global total it doesn’t carry the same weight, he explained.

Trafigura Chief Executive Jeremy Weir earlier this month said there was a chance that oil could top $100 a barrel before demand peaks.

Rahim said oil market conditions could facilitate a test of triple-digit territory “in the next year or so.”

Underinvestment by the oil industry over the last seven years has seen reserves and spare capacity fall, he said. And global oil demand is set to continue rising despite worries over the spread of the delta variant of COVID-19.

Meanwhile, restraint by the U.S. shale industry, which hasn’t ramped up production as in the past in response to rising prices, has left the Organization of the Petroleum Exporting Countries and its allies — a group known as OPEC+ — with a lot of sway over prices.

The restraint on the shale front reflects what’s known as backwardation in the futures market, with prices for nearby contracts trading well above those for much later delivery. That signals sharp demand for oil right now, but to entice big shale players back in, a rise in those deferred prices will likely be necessary, he said.

A consensus forecast for a weaker U.S. dollar has taken a hit after the Federal Reserve signaled that policy makers expect official interest rates to rise sooner than investors had expected. That could be seen as a headwind for commodities, some analysts have argued. A stronger dollar makes commodities priced in the currency more expensive to nondollar users.

Read: How a weaker dollar could help fuel a commodities boom in 2021

Rahim argued that rising U.S. international trade and fiscal deficits are likely to pressure the dollar over the long run, but that a stronger currency in the interim isn’t necessarily the “worst thing” for commodities. That’s because it would allow shoppers to continue to consume imported goods, allowing the U.S. remain the “rising tide that will lift all boats,” and fueling commodity demand.

And it’s also important to note that while demand for some commodities appears to have softened, in many cases that’s due more to supply issues than buyers being priced out of the market, Rahim said.

Take housing, for example, where sales have slowed down not due to a softening of demand but due to a lack of housing inventory resulting in part from lumber bottlenecks, he said. That has knock-on effects, delaying the purchases of washing machines and other appliances, that serve to temporarily curtail demand for other commodities.

In other words, there’s still significant “deferred demand” in the system, Rahim said.

So does that mean that another bona fide commodity “supercycle” is in the offing?

The problem with that term, is that there are numerous definitions of a supercycle, Rahim said. At the same time, any time prices begin to come off the boil, there are observers eager to declare the commodity rally a flash in the pan.

“This is about a long-term, multiyear, multi-regional, multicommodity growth story,” he said.