The next commodity supercycle may already be underway

The bull case is that central banks will accommodate this fiscal expansion much as they did 50 years ago (bar the Bundesbank), deliberately letting their economies run hot to achieve “escape velocity” after the long malaise of secular stagnation.

Goldman Sachs says this revival of inflation will lead to the “revenge of the old economy”, and the effect will be turbo-charged:  a V-shaped recovery in demand will collide with a structural supply shortage, something normally seen only towards the end of the business cycle but already visible today even in a downturn. “Nearly every commodity is in deficit despite lockdowns,” it said.

This includes oil once you strip away the distortions of the pandemic. Upstream investment in new oil and gas fields neared $900bn a year in the glory days. It halved after Saudi Arabia flooded the crude market in 2014 and prices crashed.

Then came the Paris climate accord. The advent of electric vehicles and talk of stranded assets scared the bankers away. The capital markets began to shun Big Oil.

The International Energy Agency said investment remained stuck at $480bn in 2018 and 2019, and will barely reach $300bn this year.  The IEA’s Fatih Birol says well depletion is eroding 3pc of global supply annually. “We’re losing one North Sea each year,” he said.

Eventually, there must be a crunch. Goldman Sachs says that moment is coming sooner than generally supposed. The Covid second wave is a “speed bump” that will not prevent a rebalancing of the crude market as the glut is cleared next year.

Mr Currie thinks Brent prices will reach $65 by the fourth quarter. From there, presumably, it is off to the races since he calculates that 8pc of global supply will vanish by 2025.

America’s nimble frackers in the Permian shale basin have stepped in quickly with fresh supply in previous mini-cycles but this time they are under much tougher financial discipline, and their best seams have mostly been tapped.

Westbeck Capital said the oil market is heading for a perfect storm. Insider buying by oil executives has reached record levels. There could soon be a buying scramble to unwind hedge contracts – de facto short positions – setting off a feedback loop. China and India are rushing to acquire stocks while crude is still below $50. “All the stars are aligning for a powerful bull market,” it said.

Biofuel substitution kicks in once oil prices go much above $60, which in turn squeezes grain supplies and tightens the agricultural market. The process ultimately risks a repeat of the 2011 food shortages, which set off global riots and ignited the Arab Spring.

Electric vehicles are not going to change the immediate equation for oil, even if 31pc of new car sales in Germany last month were EVs or hybrids. It will take years to whittle down the global stock of petrol and diesel vehicles on the road.

The great green switch can happen in parallel with another crude price spiral. The paradox of net-zero is that it almost guarantees an oil price shock on the way. I suspect that we will see $100 again at some point before we all rush out to buy ever-cheaper EVs, and the oil industry goes into faster run-off.

My own view is that Goldman Sachs is right about the commodity supply crunch – up to a point – but the jury is out on the putative global spending boom and the return to inflationary economics.

Gridlock in Washington heralds austerity-lite. The Republican Senate will agree to some infrastructure stimulus and a splash of money on green super-technology – to combat China – but it will not fund Joe Biden’s $1.7 trillion shopping list of windmills, solar panels, EV charging points, and the like. Nor will it fund his $7.9 trillion Rooseveltian expansion.

The US Federal Reserve lacks the legal authority to deliver compensating monetary stimulus with rates at zero and with QE magic wearing off. It is pushing on a string. “It can’t make the real economy take off like a rocket,” says former Fed governor Randall Kroszner.

The European Central Bank said in its monthly bulletin that eurozone fiscal policy will be “contractionary” in 2021. Most countries are not spending enough to avoid permanent scarring from the pandemic. The EU Recovery Fund is too small and will come too late to make much difference in 2021 or 2022.

The ECB can keep mopping up Club Med bond issuance to avert a sovereign debt crisis, but it too is pushing on a string with negative yields across the board. It can keep lending cheaply to banks but that does not prevent a slow-motion solvency crisis as post-Covid defaults do their worst.

As Chancellor Rishi Sunak said on Wednesday, the pandemic hangover in Britain will be long and grim. Most of the world faces some sort of legacy damage.

There will be another resource supercycle. The rhythms of the commodity market are as old as the Pharaohs. But this one may be less exuberant and more sluggish than the last one. History never quite repeats itself.

telegraph