There’s more underlying proof of commodity price strength, with the Bloomberg Commodity Spot Index (which tracks 23 energy, metals and crop futures contracts) rising above a previous decade high set back in 2011, to reach a fresh all-time high. Resurgent commodity demand is coinciding with supply constraints, leading to real worlds shortages and inflation.
Among the biggest gainers are energy commodities – especially natural gas, which has surged amid shortages in both Europe and China that are threatening to spread to other parts of the world. Oil too is at its highest level in almost seven years after OPEC+ continue to maintain a gradual supply increase.
Meanwhile, the reopening of major economies has unleashed pent-up demand for transportation fuel and all commodities used in manufacturing. That’s happening at a time when new mining and oil developments have stalled. The price shocks have already drawn comparisons with the mix of economic stagnation and oil-driven inflation that dominated the 1970s – stagflation. Persistent fiscal deficits and low interest rates have also made commodities more attractive to investors seeking a hedge against inflation.
Oil is now trading at its highest level since 2014, as the OPEC+ group elected to maintain a managed and gradual increase in oil supply at their meeting on 4 October, despite booming demand and supply problems. OPEC+ ministers have ratified the previously-agreed 400,000 barrel-a-day output increased scheduled for November (as opposed to a consensus expectation of 800,000 barrels-a-day). At the same time, a global natural-gas shortage has boosted crude consumption by 500,000 barrels a day. With winter ahead, there is a very strong prospect of significant price upside from here, especially with US shale production not coming to market as it has done in the past when prices have spiked. In all, crude inventories are close to a 10-year low. OPEC+ ministers will meet again on November 4.
Coal prices have hit record highs, with high-quality thermal coal loaded on ships at Newcastle port hitting $203 a ton, breaking the previous record set back in July 2008. Recently, Chinese Vice Premier Han Zheng ordered its state-owned energy giants to secure fuel supplies for winter at any cost. China consumes and mines half the world’s coal, and it’s also the largest importer. Thermal power generation in China was 14% higher in the year through August than in the previous two years.
And it’s not just China – there is a shortage of thermal coal in Europe, which is pushing up prices. What we’ve seen in Europe is that the transition to green energy has been poorly thought through, and there’s been no back-up plan implemented in the event of supply shortages to gas.
Gold is performing steadily as market uncertainty reigns, primarily due to inflation. The only thing working against gold at present is a strong US dollar. As equities have been sold off due to inflation fears, the US dollar has risen. However, fears of stagflation – where rising cost pressures coincide with a slowdown in growth – have helped boost gold’s prospects as a haven asset. There are many factors that continue to provide ongoing support for gold – worldwide debt levels, currency debasement, inflation fears and Fed inaction on ultra-low interest rates.