Demand for commodities is booming but supply is sputtering, creating a chronic shortage condition that is exacerbated by logistics disruptions, lagging capex, and geopolitical tensions. Kim Parlee speaks with Hussein Allidina, Head of Commodities, TDAM, about what is driving a new commodities supercycle.
Print Transcript
- Hussein, oil's hitting a new seven-year high. I think the Bloomberg Commodities Index is now sitting at its highest level since 2015. And we're up almost 75% since the pandemic lows, which again, lows are low. So it's easy to have that high bar. Are we really truly entering into what you see as another commodity supercycle? Or is that overstating it?
- No, I think we are. And I think, Kim, the backdrop is one where, after 10 to 12 years of underinvestment through the bear markets following the last supercycle, the impact of that CapEx is starting to show up in the dearth of supply we have across commodities. We saw it materialize in coal and natural gas first in Europe and in China. I think oil is now starting to show signs of that tightness.
And I think when we look at other commodities-- nickel, aluminum, copper, zinc, and even some of the AG balances-- they're are all tightening. And this is all symptomatic of years of underinvestment. We still use these commodities to drive our economies, pretty material contributors to the growth that we're seeing. And without the supply, you have tight balances and higher prices.
- I know you brought a chart here of OPEC production. We'll bring this one in. And it certainly shows exactly what you're saying, is that there's just less of the stuff being produced.
HUSSEIN ALLIDINA: Yeah, so OPEC has agreed to increase production by 400,000 barrels a day every month through the remainder of-- at least through the next several months. That chart shows you that they haven't actually been able to keep up with their production target. So they're falling short. And I think that's raising questions in the market around OPEC's spare capacity. How much, ultimately, is there?
We talked in December. You know I don't think that spare capacity is as high as some of the published numbers suggest. And I think that the chart that you're showing there underscores, to some extent, that it's not as fluid as we'd like to see.
- Can you talk to me-- I mean, there's the fundamental story, of course. And then there's, of course, the-- I'll say the investment story. For those who are looking where they want to allocate their capital in the next little while, the interesting thing, I think, that's happening right now is we've got this supply tightening of many commodities overall, as you talked about.
But at the same time, you got interest rates and the central banks getting ready to raise interest rates, which usually means the dollar moves up. And usually when the dollar moves up, commodities come down. So how does this all net out from your perspective?
- It's a very good question, Kim. So I think the relationship between the dollar and commodities is not a static one. We do have periods where stronger dollar, particularly if the dollar is stronger owing to a safe haven bid or about a risk aversion, you do see the dollar strengthen and commodities weaken.
We have also had extended periods-- last year as an example-- where commodity prices increased and the dollar increased. If the dollar is strengthening because of growth or rate outperformance in the US relative to the rest of the world, I think it's completely plausible-- and history proves that you can have commodity strength and dollar strength. If the dollar is increasing because the US is outperforming on a relative basis, totally consistent to see commodity prices perform as well.
- Is this a-- when I say a blip, I mean, I guess the blip is in the eye of the beholder, because at some point, we are moving to different kinds of energy. We're transitioning to a low-carbon world. So this conversation is going to be different 20 years from now than it is today. Or maybe it's not. I mean, you tell me. How long do you see this commodity supercycle lasting until we transition successfully into a new way of doing things?
- I think you hit it right on the head there. I do think we're in the midst of a transition. I don't think it's a two-year transition or a five-year transition. Today, renewable fuel contributes maybe 20% of the total energy that's consumed.
Our ability to transition away from conventional fuels is going to take time. I think it's going to take longer. It has already taken longer than a lot of people predicted 5 or 10 years ago. Again, today if I look at how oil is used, we use it largely in transportation. It takes time to roll over the car fleet. And unfortunately, we've stopped investing on the supply side. We've reduced our supply faster than we're able to reduce our demand.
So I think specifically as it relates to crude, Kim, I think crude prices will continue to find support over the course of at least the next two to five years. I don't think we've seen the highs. I think they're still to come. And I think it comes because inventories continue to draw on spare capacity that continues to decrease.
- I know the last time we talked, Hussein, you talked about the fact you would not be surprised to see oil over $100. I see lots of people making some pretty bold predictions going a whole lot higher than that. I mean, could we see some real spikes in the next little while?
KIM: So the way I think through it is, at what price does oil start to challenge economic activity? At what point does a higher oil price effectively crush the economy? And we're probably 30%, 40% off of, in real terms, the levels where your oil expenditure as a percentage of GDP reaches that sort of 7%, 8% level that, historically, has been the peak. Still 30%, 40% away from there.
Do I think that oil is going to trade north of $100? I do. I'm not going to make that call as to whether it happens in the next couple of months. I do feel pretty confident that over the course of the next 12 to 16 months, we will see triple digits. And that will come as inventories drop and, again, spare capacity is challenged.
- Hussein, it's always great talking to you. It's super, super enlightening. Thanks so much.
- Thanks for having me.
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- No, I think we are. And I think, Kim, the backdrop is one where, after 10 to 12 years of underinvestment through the bear markets following the last supercycle, the impact of that CapEx is starting to show up in the dearth of supply we have across commodities. We saw it materialize in coal and natural gas first in Europe and in China. I think oil is now starting to show signs of that tightness.
And I think when we look at other commodities-- nickel, aluminum, copper, zinc, and even some of the AG balances-- they're are all tightening. And this is all symptomatic of years of underinvestment. We still use these commodities to drive our economies, pretty material contributors to the growth that we're seeing. And without the supply, you have tight balances and higher prices.
- I know you brought a chart here of OPEC production. We'll bring this one in. And it certainly shows exactly what you're saying, is that there's just less of the stuff being produced.
HUSSEIN ALLIDINA: Yeah, so OPEC has agreed to increase production by 400,000 barrels a day every month through the remainder of-- at least through the next several months. That chart shows you that they haven't actually been able to keep up with their production target. So they're falling short. And I think that's raising questions in the market around OPEC's spare capacity. How much, ultimately, is there?
We talked in December. You know I don't think that spare capacity is as high as some of the published numbers suggest. And I think that the chart that you're showing there underscores, to some extent, that it's not as fluid as we'd like to see.
- Can you talk to me-- I mean, there's the fundamental story, of course. And then there's, of course, the-- I'll say the investment story. For those who are looking where they want to allocate their capital in the next little while, the interesting thing, I think, that's happening right now is we've got this supply tightening of many commodities overall, as you talked about.
But at the same time, you got interest rates and the central banks getting ready to raise interest rates, which usually means the dollar moves up. And usually when the dollar moves up, commodities come down. So how does this all net out from your perspective?
- It's a very good question, Kim. So I think the relationship between the dollar and commodities is not a static one. We do have periods where stronger dollar, particularly if the dollar is stronger owing to a safe haven bid or about a risk aversion, you do see the dollar strengthen and commodities weaken.
We have also had extended periods-- last year as an example-- where commodity prices increased and the dollar increased. If the dollar is strengthening because of growth or rate outperformance in the US relative to the rest of the world, I think it's completely plausible-- and history proves that you can have commodity strength and dollar strength. If the dollar is increasing because the US is outperforming on a relative basis, totally consistent to see commodity prices perform as well.
- Is this a-- when I say a blip, I mean, I guess the blip is in the eye of the beholder, because at some point, we are moving to different kinds of energy. We're transitioning to a low-carbon world. So this conversation is going to be different 20 years from now than it is today. Or maybe it's not. I mean, you tell me. How long do you see this commodity supercycle lasting until we transition successfully into a new way of doing things?
- I think you hit it right on the head there. I do think we're in the midst of a transition. I don't think it's a two-year transition or a five-year transition. Today, renewable fuel contributes maybe 20% of the total energy that's consumed.
Our ability to transition away from conventional fuels is going to take time. I think it's going to take longer. It has already taken longer than a lot of people predicted 5 or 10 years ago. Again, today if I look at how oil is used, we use it largely in transportation. It takes time to roll over the car fleet. And unfortunately, we've stopped investing on the supply side. We've reduced our supply faster than we're able to reduce our demand.
So I think specifically as it relates to crude, Kim, I think crude prices will continue to find support over the course of at least the next two to five years. I don't think we've seen the highs. I think they're still to come. And I think it comes because inventories continue to draw on spare capacity that continues to decrease.
- I know the last time we talked, Hussein, you talked about the fact you would not be surprised to see oil over $100. I see lots of people making some pretty bold predictions going a whole lot higher than that. I mean, could we see some real spikes in the next little while?
KIM: So the way I think through it is, at what price does oil start to challenge economic activity? At what point does a higher oil price effectively crush the economy? And we're probably 30%, 40% off of, in real terms, the levels where your oil expenditure as a percentage of GDP reaches that sort of 7%, 8% level that, historically, has been the peak. Still 30%, 40% away from there.
Do I think that oil is going to trade north of $100? I do. I'm not going to make that call as to whether it happens in the next couple of months. I do feel pretty confident that over the course of the next 12 to 16 months, we will see triple digits. And that will come as inventories drop and, again, spare capacity is challenged.
- Hussein, it's always great talking to you. It's super, super enlightening. Thanks so much.
- Thanks for having me.
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