Odd Lots - Goldman’s Jeff Currie: It’s a Commodities Supercycle, and We Still Haven’t Hit Max Pain

Episode Date: October 18, 2021

Back in January, we spoke with Jeff Currie, the Global Head of Commodities Research at Goldman Sachs. At the time, he was bullish on the commodities complex for several reasons. Since then, of course, we've seen several markets go on an absolute tear and to a degree that's taken even him by surprise. The bad news for commodities consumers? We still haven't hit max pain. On this episode, we speak again with Jeff about what's driving prices higher and why he sees stronger price increases over the next several months.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, you see we just got the latest CPI report? I did indeed. Looks like CPI came in slightly hotter than expected.

Like not a huge deviation from the forecast. But of course, everyone's talking about the idea that, well, all of this was supposed to be transitory. and yet, you know, here we are almost two years into the global pandemic, and it doesn't seem like any of this is going away. Right. And so, of course, there's this debate about what transitory means. Does it mean pandemic-related or does it mean brief? So we're starting to split hairs on that. And then there's also, you know, of course, the deviation between headline CPI, which includes energy prices at core, which doesn't. But the degree to which you could really ever, like, separate out commodities from the fact that commodities go into everything is kind of impossible.

And with the exception of a few things, I mean, we are on a massive commodity slash energy bull run. Yeah. So the crazy thing here is that people were worried about higher inflation even before the commodities market really started going nuts, like just in the past month or so. I mean, I'm looking at some of the energy headlines that have just come over, the Bloomberg, today and it's stuff like, you know, European zinc smelters cutting production by as much as 50% because of higher energy costs and, you know, a flood in a major Chinese mine and the Chinese

government ending its intervention in the coal market. So basically liberalizing that entire market, which isn't something that you tend to see that much in China, but is something that is sort of needed given the energy pressures right now. So things have just gotten like to a whole new level when it comes to commodities. Yeah, and it's interesting. You framed that really well because, you know, sometimes we do our logistics episodes, and one of the themes is the way these sort of pressures compound, right? So something that happens at the port of Los Angeles ends up affecting warehouses, which ends up affecting truckers, which ends up affecting rail at Chicago. And it feels like on the raw commodities front, you see the same thing where it's like, oh, some energy price spikes,

and then the zinc smelters and the fertilizer companies have to pare back production because their production is no longer profitable. And then that feeds into some other commodity or something like that. And so it feels like there is a similar compounding effect. And it seems like a combination of demand supply, obviously. And then there's sort of like all kinds of idiosyncratic factors, like whether it's droughts or whatever. Yeah. Well, the other big thing that people are talking about now is how much of this is cost.

by the transition to clean energy. So this idea that we've had years of structural underinvestment in traditional fossil fuels, and now we're sort of reaping the consequences of all of that. You know, we don't have enough renewable energy to satisfy demand just now, but we also don't have enough traditional fuel. So there's just so much going on in the space. Yeah. And that seems particularly salient in Europe where they sort of pretty aggressively phased down nuclear,

and now the natural gas bills are soaring. Wait, wait, wait, I just got to say, now some people are talking about reclassifying nuclear as ESG, so something that would fit under the environmental and social and governance-friendly mantle, which is something that, you know, if you suggested that a few years ago, people would have gone absolutely nuts. Anyway, go ahead. Anything to fit anything within ESG is probably like its own story. Anyway, we have the perfect guest on, because not only is he probably the best person to talk about commodities with, period. But we've had him on before. We had him on earlier this year, actually, in January,

and he was very bullish on commodities then. So in addition to being very knowledgeable, yes, exactly. In addition to being extremely knowledgeable, he also has the benefit of having been correct, which a lot of people weren't. And so now we'll see what's next. Excited to bring in our guest, we're going to be speaking again with Jeff Curry. Here's the global head of commodities research at Goldman Sachs, a real, treat to have them on. Jeff, thank you so much for coming back on Odd Lots. Great. It's a pleasure to be here again. So it's been, I guess, like nine months since we had you on in January, and you were sort of caught, you called, you were bullish, and you said, this is like a big one that you saw a big cycle

coming. And obviously, if you just look at the B-Com, the Bloomberg Commodys Index, or numerous, you know, other headline measures, that was right. And so what, what's your take on what happened? And how does what happened compare to what you foresaw? Yeah, it's far more bullish than, you know, we could have ever envisioned. Let's take oil. The deficit that we can measure at the end of last month was running somewhere around 4.5 million barrels per day. That's nearly 5% of the market is in a deficit.

That is such a large hole that OPEC, the U.S. administration, nobody's going to fix this. This is like, you know, the train is off the track. and you're watching it in slow motion, but it's not just oil. You see it in copper. Copper inventory is dropping 8%, 10% week after week. These are numbers I have never envisioned or never seen before. And you can think about what is going on here. And I think it goes back to Tracy's point about that zinc smelter shutting down in Europe. That problems in one market create problems in the other. So when we think about, you know, first it was coal in China, then it became gas in Europe, then it became aluminum in China, which then impacts copper elsewhere in the world. And it keeps this chain reaction going.

And each one of these markets get tighter and tighter. So what is it about oil that makes this deficit so much larger than we could have ever envisioned? It's because you now have oil being used in lieu of both coal and gas because of the shortages in those markets. So bottom line is, you know, we see a lot of upside risk from these price levels, which are far greater than the price levels we were forecasting when we spoke, you know, nine months ago. So bottom line, the underlying picture is far more bullish than what we had expected nine months ago. But the drivers of it are pretty much in line exactly what we thought, just in a much larger degree than what we thought. Yeah, if I could just press on this point. So I remember when

when you unveiled your bullish commodities thesis, you know, around the start of the new year or the end of 2020, you sort of had like a trifecta of reasons that you thought were going to drive the market. And one was the idea of this redistributional demand. So basically, you know, people getting stimulus checks and going out and buying new things and buying steak dinners and things like that. And the second one was, I think, structural underinvestment in traditional energy like oil. And then the third was this idea of supply chains and stockpiling. So people just sort of trying to build up their own energy independence or resiliency. And I'm curious, just looking back at that framework, is there a particular thing that that has surprised you or stood out?

Like, is there one leg of that sort of tripod analysis that has really, like, caused the big spike that we're seeing? Actually, all three are far more important than what we ever envisioned. And I actually want to go with the one that predates COVID. And the one that predates COVID is the underinvestment thesis. You know, the theme that we termed it is the revenge of the old economy. Put bluntly, poor returns in the old economy saw capital redirected away from the old economy and towards the new economy, basically taking from the exons of the old economy. Basically, taking from the exons of the old economy. the world and given to the Netflix of the world. And as a result, you starve the old economy of the capital base it needed to grow production. And hence the problems we have today. So if it's trucking in the U.S., which is old economy, chip manufacturers for autos, which is old economy, energy and gas in Europe or coal in China, they're all the same story. Now, you can argue with the hydrocarbons, as you pointed out, that the ESG factor turbocharges this story, and it clearly has in places like Europe. But I want to emphasize at its core is that these companies have

failed to deliver good returns over the last five to 10 years and investors have had enough. And I like to point out, you know, we got a lot of investors back into the commodity and the old economy space, you know, when we were talking last January, but prices went up to 80 this summer on oil. And I remember it was late August, around August 28th. There was a Friday. Oil collapsed back down to 65. And these investors going, you're lewdess, back in there, you said the coast was clear, we got in here, and we just got completely hammered in terms of the volatility. They left. Then oil prices, where are they getting? They're back up to 83. And that's something inherent about the investments in here that make it difficult to attract capital.

It's not going to be a smooth ride, you know, like it is in tech stocks where you just trend up. Instead, it's going to be very volatile. So the bottom line, we're sitting at $83, $84 barrel today. And there's no evidence of of big increases in CAP-X, drilling, greenfield CAP-X in metals or new acreage in agriculture, I can keep going down the list. So not only are the C-suits, the corporates, not spending on CAP-X, but the investment dollars in this space is quite low. And as a result, if you get the investors to come back in this space, which we think could happen as we go into year-in, it could catapult the situation on relatively tight fundamentals

that I started this discussion with. So I would say that's the one I want to point out that started by, but just quickly on the redistribution story that you bring up. The redistribution story is much broad-based around the world than what we initially thought. And if we think about, you know, in the U.S., when we were talking in January, could we have ever envisioned the $3.5 trillion U.S. human infrastructure fund?

Absolutely. It was, I mean, this shows you how much larger these redistribution policies have become. Also, you know, the $1.9 trillion recovery act back in, you know, March, then we thought it's going to be $1.1 trillion. It shows you just how much bigger these redistribution policies. China has its common prosperity, green leveling here in the UK. So it's very, you look at Germany's government going, you know, moving left, you know, Latin America's moved left since we last talk. So bottom line is, you know, the redistribution policies are also bigger than what we thought. And then finally, just point on, you know, about the call it de-globalization. I like to argue the trucking problem in the

U.S. exemplifies the problems around de-globalization. It's because you have too much stuff being produced locally at home in the U.S., which overwhelms the transportation, warehousing, trucking, rail system, which has helped create some of the problems there. So one way you can think about, United States exemplifies the problems with de-globalization. Europe exemplifies the problems with decarbonization, what's going on and it's gas crisis. Anyway, that's a long answer to your question, but all three are surprised at the upside. I mean, we want to hit all these topics more, but let's go a little bit more into the sort of, like, decarbonization ESG stuff, because I think there are a lot of people who are like,

ah, we told you so. You had your, like, you politicians had your visions of, like, a green economy where we would all, like, power everything with windmills and solar panels and now look and now look at the price we're paying and maybe we won't even be able to heat our homes. But the way you described it as a little bit as like maybe some of that, but also like politics aside, a lot of these traditional fossil fuel investments were not great, period. So how much is it sort of, as you say, decarbonization policy that contributed to that's contributing to this revenge of the old economy versus decarbonization economics where people just weren't making the investment.

because the numbers weren't good. Yeah, the bottom line is the returns in this sector were abysmal. And I don't care if it is oil, gas. When you say this sector, you mean just to be clear for your fossil fuels. Think about it. Oil prices were negative last year. You couldn't create a more hostile environment. You know, so when you look at the investors that I try to get to come back in this space, they're going, no, I've been there. I've done that. I know how painful this sector is. And so the way you could argue is, e. ESG, the binding constraint, show me a great company with fantastic returns that's not getting capital due to ESG. Right now, they don't get returns because they've demonstrated a very difficult environment to generate returns on average. In fact, you know, you look at it, they've shrank down to 2.5% of the S&P 500, which show, you know, they give you an idea in the late 70s.

They're running around 20%. So it's a big shift here. And I think, you know, so, you know, I spend time talking to many, you know, you know, energy specialists and you get CIOs of these big asset managers on and going, hey, I'll listen to him once, but I've been there and done that before, and I'm just not that interest. And here's a point when you look at the 2000s, that bull market. Price is spiked in 03, but it wasn't until 06 that the CAPX began to flow. Why? Because they had a couple years of really good returns, and the investors felt really good about it. But I think, you know, the key point here is first and foremost, it is the

revenge of the old economy and poor returns why the sector doesn't get money. More recently, you can say that, you know, it's likely to be ESG. But I'm going to give you an example in Europe where it clearly is ESG. You know, the courts in Europe, the Hague, ruled against Shell, made Shell liable for scope three emissions. That's what the users of oil create. You know, that's massive liability. Yes, they'll appeal it. It's going to be, you know, five, ten years from now. I think the key point here is that with that kind of liability risk, nobody in their right mind is going to make large-scale investments in places like the North Sea again because they don't want to be associated with that kind of liability. So it is beginning to bite, but it's that, you know, your standard ESG investors,

and I do want to say they've raised the cost of capital, and we're going to find out, and this is where the ESG really comes into play, is we're going to find out what price of oil do you need to get capital to flow. I like Scott Chaffield, the Pioneer. he said a few weeks ago, he goes, I don't care if the oil price goes to $100 a barrel. I'm not going to drill. What's going to make me drill? I need my stock price to double.

And we're going to find out at what price of oil these investors will start to buy these stocks again. You may be right, Joe, it may be, you know, that they're just not going to buy it because of ESG concerns. I tend to think that's not the case. There is a cost of capital associated with decarbonization, and we're going to find out what that cost is. just on the topic of oil, I mean, how much blame can you lay at OPEC for investor unwillingness to put money into stuff like U.S. shale? So, you know, there was always the sense that if shale flooded the market, then OPEC would react in some way and boost their own production and drive a bunch of the shale producers out of business. And then now, even as we see oil prices pressured higher, I mean, OPEC is still being pretty disciplined in terms of, terms of production. They haven't said they're going to ramp up output by that much. So I guess the

question is, like, what role does OPEC play in investors' calculations? The current OPEC, they got religion, they understand it, they've been through a lot of pain. They couldn't have a better business model than what they have today. They're focused on balancing the market on a near-term basis, keeping inventory low, keeping the forward curve on what we call a backwardation, or focused on what they can control, which is the very near-term balance. And then they create a credible threat that will bring on capacity, bring investment on, which keeps the back end of the curve, it depressed. So they got what we call a back-radated curve.

Spot prices are high, back-end prices are low. But to get to that level, to get to this great discipline, and I would argue, you know, a great policy structure, which makes sense, given how much share they control in the market, it was a big policy mistake. And that policy from November of 16 until March of 2000. 2020 was utterly disastrous and created a lot of problems we have today. They didn't, they're not a monopolist. They're not like the Federal Reserve where they have 100% market share over the dollar.

They don't have, they have maybe, you know, put them all together, a 33 to 40% market share over the barrels. And so for their ability to cut back production and maintain prices at 60 to 65 was always invariably unstable. And the investors that got lured into investing in the sector based upon that $60 price had a high probability of having the problems that they ran into in late 19 and 2020. But I do want to say, I think they've learned from those mistakes, you know, that the new

group of energy ministers in particular, I think, they understand all these issues. And so I'd argue they're doing a fantastic job, but they're really sticking to what they're supposed to do and what they're really good at is managing a near-term imbalances in the market and focusing on providing capacity on a longer-term basis, which is left. the curve and a forward curve and a backwardation, which makes it really difficult for, you know, the EMP producers to hedge. Why? Because prices are, you know, a huge discount on the back end relative to where they are in the spot. Hello, I'm Michelle Hussein. And for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further

than the news of the day to spend more time with the people shaping our world. And this, That's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Russia needs to be taught a lesson, to tech journalist Karaswisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices.

This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michelle Hussein. same show from Bloomberg weekend, wherever you get your podcast. It certainly ask interesting questions. So before we move off of oil, I want to talk about U.S. oil a little bit more. And, you know, I'm thinking back to like 2014, 2015, the good old years, and there was this

perception, or there was this characterization of U.S. shale as the swing producer that sort of kept a lid on prices because as soon as prices would rise a little bit, they could quickly quickly ramp up production and that would bring prices down. And part of it was a rate story maybe. Part of it was a technology story. What is the status of U.S. production now and why is it not having that effect of being able to ramp up aggressively and sort of smoothly? I mean, I think there is some increase in the rate counts, but as you said, not that much.

So why are we not seeing something greater out of the U.S. is a stabilizing force. For one, back then, you know, the companies were rewarded on volumetric growth, not on return on equity. The investors paid a terrible price for that period. You look at the industry and, you know, it destroyed a lot of wealth, like 10 to 20 cents on every single dollar. I think the number is actually closer to 30 cents on every dollar. So basically like every, so basically that aggressive supply response was just a mistake. Like it was just a bad, it was, in retrospect, it turned out to be a bad approach to business? Because they were, they were operating at like 105 to 115% of cash flow.

So, you know, what they were doing is they're basically growing volumes on the expectation of future returns. But obviously, when you grew all those volumes, you would get crushed on the back in terms of what was being delivered. And so the focus left being a focus on ROE and instead being a focus on growth. Today, the focus is on ROE. They want to get those return on equity up. And by the way, the investors who own this company, they want their money back. You know, the OPEC ministers want their money back. Everybody wants their money back from the disastrous experience over the course of the last, call it, you know, five to seven years. So at this point, you know, you look at why aren't they drilling? Because for the first time

in nearly a decade, in fact, you probably have to go back to, oh, yeah, you got to go back to 07-08 that these companies are finally getting free cash flow going up. They're not overspending. They have returns moving higher. And so now they're getting rewarded on return on equity as opposed to growth. And it's going to be a while. They're going to get everybody wants to be made whole. And then they're going to get the green light to go out and invest.

It goes kind of the point. I think Scott Sheffield got it right. The focus here is not on the dollar price of oil, but where is their stock price and their access to capital? Now, here comes the whole ESG issue, which means that that hurdle rate is going to be higher and higher before that capital is going to come in and make that stock price go higher. I tend to think there's always somebody in the world out there who's going to buy this, which is why when you look at the investors that do pursue these ESG strategies, it's going to be difficult because there's going to be somebody out there in the world that's not restricted around these is going to go out and make these investments, which I think, you know, makes it, you know, it's not a level playing field right now. Since you brought up ESG, I mean, I guess the obvious question here, the big question is, what does all this mean for ESG or green investment? Do we start to see a backlash to green investing and do investors, you know, maybe start pulling out capital or put less capital in or divert some capital to, you know, older fossil fuel energies, things like that?

Well, you know, I have a couple points on that. one, divesters never solved any problem. And when we think about, you know, with, you know, ESG in particular, it came about originally because the Europeans were getting frustrated that the Americans and Chinese were not doing anything on the policy side. But why, the problem why the investors drifted into the policymaker lane is the policymakers weren't doing their job. And when we think about what job they need to do, they need to create, you know, rules around decarbonization that allow operators to operate around and gives investors the rules of the road in which to invest around. And that's kind of the problem is that there's this nether world as occurring.

They get these investors just trying to invest in, or policymakers trying to make these investments in things that they don't really understand. And I think it's a really risky environment that we're in. And I think what's going on in Europe is a testament to what the misallocation of capital that it can occur in this environment and where you're not that markets dictate. and policymakers dictate what the rules of the road are and what, you know, investing around those rules of those roads. Just on one of those points there, I mean, the point about the role of the government there is

well taken, and that's been one of the major criticisms of ESG, that they're trying to fulfill something that should actually be done by governments and through new laws and things like that. But there's also this sort of foundational debate in ESG about whether or not it should be investors engaging with companies to make them change their behavior. So you care about the environment. You're invested in Exxon or Shell or whoever. And you try to encourage them to change their behavior by actually being invested and having a relationship with the company.

Or do you ignore them all together and invest only in companies that are doing renewable energy that have divested all the old traditional dirty stuff? and you try to increase the cost of capital for anyone who is basically in that old energy space. I don't know what my question is here, but I guess it's how do you think ESG should function? Like, what is ESG trying to do? I think, you know, your Exxon example is spot on. You know, it's going there. Going in there and helping the situation and trying to find the solution is the right answer.

It's the divest your knee-jerk reaction. that's the dangerous one. And I want to really distinguish between that. So when we think about, you know, ESG that preserves the, you know, the market signaling, then it's working great. It's just there where you go, okay, anything that's hydrocarbon is bad, let's shut down the investment. Because bottom line, India should not have three days of coal stocks left right now. Just think about that, three days of coal stocks.

And if all of a sudden you had a major disruption, India would be out of power in three days. That's a dangerous place to be for one of the largest, most populous countries in the world. Let's talk about some of this sort of ongoing sort of mechanical disruption issues that we're seeing. And I want to actually focus in on what we're seeing in China because it seems to be there's a number of moving parts. Tracy and you both talked about that earlier. Overall, what is your take? Let's start big picture and then maybe zoom in on specific commodities. But overall, what's your take on sort of like the Chinese?

energy picture because it seems like very extraordinary and unusual. Well, you know, it boils down to shuddering of, you know, very toxic cold mines. I like to point out what China is going through today is very similar to what the U.S. did in the 70s when, you know, creation of Superfund sites. So it shut these down reasonably. These things are very toxic. Then you don't have the investment in coal globally. And then you have a.

foreign policy spat between Australia and in China. So you put it all together. The access to coal dropped tremendously. Post-COVID saw an end. By the way, this is all stems to the fact that these supply constraints were there. It took that post-COVID surge in demand that exposed it all across, you know, metals, oil, gas, coal, trucking, you know, whatever, pick your industry. It exposed them all in the old economy. And it happened to be particularly acute in coal in China. So then what happened is then they had to replace the lost coal with gas. So they started to hoover up the world's LNG supplies. Then they started replacing it more recently with oil. And that's what's helped create the big deficit in oil and the bid in oil. So the bottom line is, you know,

you put it together, the situation is dire enough that even our economists have trimmed fourth quarter GDP to being flat with three quarter and taken down first quarter of 22. Now, there's investments in coal in Mongolia and then, you know, potential increase in exports of 300,000 tons that many people point to the means this problem goes away next year. It eases the problem. What about further growth rates in GDP and more activity? It just puts more stress on the system. That's why we like to argue this thing's a super cycle, meaning that, and then think about how much stress you put into aluminium, zinc, and all these other industries where you've had to shut down smelters.

So if you want to really think about the chain reaction here, some people kind of simplify the world. It starts in China, coal, and China, and then that creates tightness and gas that created the problems in Europe. Europe substitutes into oil, creating a problem in oil. You've shut down the alley smelters, the zinc smelters. And so a lot of people say, you know, that the ground zero of this problem really was coal in China. So I do want to say the situation in China is very dire, but there's just one part of the world that can create a solution to it rather quickly. And they're trying to with investments in Mongolia. But I want to be careful about restarting a lot of that shuttered coal.

For those of us that are Americans and know what a superfund site is in the U.S., restarting these facilities is going to be a lot more difficult, a lot more expensive than I think what people think it will be. So you really got to focus on the new, more cleaner, sophisticated coal in some of these mines in places like Mongolia. So bottom line, it's going to be tied over the next three to six months. But once you get that Mongolian coal up and running, the situation should ease, but no way does it solve it. You mention it briefly, but when we talk about important global commodities, obviously the first one that comes to mind is probably oil, then I don't know, maybe natural gas. aluminum prices 13-year high in China. And of course, aluminum is used in all kinds of just everyday items. So if we're thinking about how commodities bleed into sort of normal inflation, that seems like an important one to focus on. Can you walk through a little bit more about the economics of aluminum in China right now and what you see going on, sort of like putting this inexorable upward price pressure there? aluminum is a unique commodity. It's the climate change paradox. You need it to solve climate change, but it creates a lot of emissions in the production of it. So, you know, it does two of the same.

And so when we think about the situation in China right now, if you're operating on a, call it a carbon budget, you know, you're allotted this amount of carbon production for your economy, one of the most polluting, you know, commodities, In fact, it is the most polluting commodity to produce is aluminum. You're not going to want to produce. It's going to be the first thing you shut down. Think about what really is aluminum. It is solid energy. You just take aluminum and electricity.

You put the two together, and now you've got a solid piece of metal there. So if you're trying to conserve energy, conserve, you know, how much carbon you're emitting, the first thing you're going to pull the lever on is going to be aluminum. which is why you look at, you know, just, you know, China's cut two million metric tons of capacity, you know, that in about a 50 million metric ton market. So it's sizable in terms of what they've, what they've taken out on top of, you know, that stuff that's already been taken out elsewhere in the world. So that's really at the core of what's driving this. But I do want to go back to the point about cost push inflation, a commodities being driven by cost push inflation. There is zero evidence of it.

it's always demand pull in the sense that, you know, demand is strong across every single one of these commodities, services, and everything else. And it's demand pulling everything along against these supply constraints that creates the upward pressure on prices. It's not the input costs accelerating that's driving up the cost in other parts of the industry. But if you think about how did it, you know, aluminum, how does it create tightness in other markets? Because once you lose a supply, let's think about it starts with coal. tightness in coal. It's not that the coal price led to higher aluminum prices. What it was was a lack of coal led to a shutdown of aluminum smelting against strong demand that drove up the price of aluminum, which then feeds into more demand for copper as a substitute against aluminum. So you can think about it as being, you know,

the supply chain, you know, working along that way. So it's not that that the cost of, you know, energy is driving up the cost of everything, it's demand pulling everything along. And when you think about it that way, you know, that's how you get broad-based inflation because it's not just isolated. Because think about if it's isolated in one market, let's say oil prices, that's a relative price move. And if you think about if money supply stays the same, the price of oil goes up, then the price of everything else has to go down because there's an adding up constraint with money supply. But if you think about it, demand is pulling everything along, money supply is growing along with it, then the price of everything starts to grow as opposed to being a supply shock, being, you know, the relative price moving away.

On April 4, 23, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Kassiz. Ash app. From Bloomberg Podcasts, this is Foundering, The Killing of Bob Lee, beginning April 16. You touched on this earlier, but what's the difference between a bull market in commodities versus a super cycle? And like, I sometimes get the sense that like commodities experts are

very sensitive on this particular topic, mostly because I had an argument earlier in the year about whether or not what we were seeing was a commodities boom or the start of a super cycle. And people got very, very pedantic. But like, what is the difference and which one are we looking at at the moment? We're looking at a commodity super cycle, and it goes back to this demand, demand story. It needs a structural rise in demand. I can get a bull market and oil driven by a supply stock in Saudi Arabia, but that's not a super cycle. A super cycle is driven by a structural rise in demand. And why do we have a structural rise in demand? And give me a minute here. I really want to explain this point, because I think it's critical to understand.

the difference between physical markets and financial markets. When we think of physical markets, like oil or aluminium, they're what we call volumetric markets. How do you determine if you're bullish oil? The volume of demand versus the volume of supply. If demand is about supply, you're bullish. No dollars enter into the equation, no growth rates, nothing like that interest. So physical markets driven by volume. Now, what are financial markets and GDP? They're all driven by dollars. How many dollars do you pump into those markets that determines whether or not they're bullish or not? So no volume enters into a financial market. Think about equity. You quote it in billions of dollars or GDP, you quote it in trillions of dollar. Volume doesn't enter. So let me summarize.

Physical markets driven by volume, financial markets and GDP driven by dollars. Now let me ask you the following. What do the world's rich control? Dollars. They control wealth and income. Can rich create financial inflation? Absolutely yes. Can they create GDP? Absolutely yes. Can they create physical good inflation? Numerically impossible. There's not enough of them. It's a volumetric game. And so only the world's low income group can create inflation and commodity bull markets. And there is no exception to that. You cannot find me an exception. Every commodity supercycle is driven by low-income groups, as well as every bout of inflation. In fact, you know, let's start with the 70s. It was LBJ's war on poverty. The 2000s, when China was admitted to the WTO, it was a gigantic

wealth transfer of rich Americans and rich Europeans to low-income rural Chinese. Four hundred million of them. There was your volume. Created inflation in China in a commodity bowl market. You know, the inflationary episodes in Latin America tied to populist. policy. The list goes down and on. So you come to the conclusion that inflation and commodity bull markets are directly tied to populist policies, and I can't find an exception to that. So if we argue that we're in an environment in which there's a great focus on low-income groups, and even think about green cap-ex. As Joe Biden says, green capex creates jobs. As Boris Johnson here, the UK says, he calls it green leveling, spending on green cap-ax to create jobs.

So everywhere we look, even the green cap X is focused on lower income groups. And as a result, we look across the demand levels, you know, gasoline barrels were all-time high this summer. And I can go across the board. The volumes, just look at the level of demand of durable goods and everything like that. It's off the charts. So that's the reason why I think we're in a commodity super cycles, not because of anything else. Other than that simple observation that the volumetric demand growth we see right,

now and going forward is not just a, you know, it's something that's hitting all the markets simultaneously. And that's really what is at the core of a super cycle. So Stoddy losing production create a bull market and oil, but that's not a super cycle. Is that clear? Yeah, that was fantastic. So I guess like, you know, I know, I know we just have a couple of minutes left here. But I, you know, like I said, we talked to you in January. I felt like you nailed the call and then some. We're in the super cycle as you characterize it. I don't know commodities. It's always a cliche innings, so to speak, but what are we going to be talking about with you in nine months when we rebook you and how much longer is this going to be going on?

Like, give us your, what's going to happen in the future? What's your crystal ball's day? We're going to be pricing scarcity at that point in time across oil, metals, and everything at that point in time. And when we think about, you know, the transitory nature of these events, is that when the system is so strained like it is right now, it just takes us. small little problem to create a big upward movement in price. So you think about what Europe was created by. It was created by the wind quit blowing. The market had to replace that wind power

generation with natural gas, and there was no gas there in a small event like the wind quit blowing, created a massive price spike. And these are, what is saying is, before you'd have to have to draw something out of the tails to get a problem. Today, you just draw something in the middle of the distribution and you get a problem, which means that these transient events are going to be, be their higher probability and more frequent in nature. So there becomes a persistency to the transitory events. That's what scarcity pricing is all about. It's not like they're going to get a big upward trend in prices, but you're going to continue to get, you know, price spikes. So, you know, I think that most, you know, if you brought me back in six months, I think that's

going to be the highest pain point. By the time we look at nine months, you know, do you have a much higher probability of the system trying to find solutions to it. So three to six months, I think that's going to be your max pain point on oil. We have a $90 target. I want to emphasize lots of upside risk to that. We look out to next year. We're 11 to $12,000 a ton on copper, but a lot of upside risk to that. But the real upside risk, I'd argue, probably happens in that first quarter of next year.

Hopefully, when we meet nine months from now, we can say, hey, we see drilling in the U.S. We see Iran deal has come. you know, there's a higher probability to get an Iran deal where there's, the system begins to ease, which is why we see prices moving back into that 80, 85 at the nine-month horizon. So, you know, if we meet six months from now, I think you're going to be peak scarcity pricing, you know, nine months from down to a year, much higher probability that we found some type of, at least new solution. Max Payne's still coming.

Is the, is your thing? Max Payne's probably coming in the next three months, if not sooner. Max Payne still coming. Jeff Curry, thank you so much. Always great to chat with you. A real treat. And like I said, we'll have you in six or nine months back. We'll see if we're at if we're truly Max Payne.

Great. Well, thanks for having me. Thanks, Jeff. Appreciate it. Take care, Jeff. It's always a treat talking to Jeff. I just feel like I get like such a big, such a useful, big picture perspective talking to him. Totally.

And I mean, I feel like I'm a little bit biased because, um, You know, I was a capital markets reporter for a long time. I like writing about things like corporate bonds. But I, you know, I remember writing a lot about the shale boom in the U.S. as a capital market story. And I think that did a fantastic job of, like, drawing that connection once again. You're not going to get higher oil production unless investors feel comfortable putting money into the company. And the company feels comfortable actually putting that money to work in terms of investment.

and expanding production. And we're not quite at that point yet. You know what? I love that point because there is this sort of very cliche, which I've always hated. The stock market isn't the economy. Actually, the stock market is a very important part of the economy. And sometimes maybe it reflects the economy,

but sometimes it very much, sometimes it doesn't reflect the economy, but sometimes it drives the economy. And so when you have a CEO, as he was pointing out, and I want to go find that transcript, where he's like, you know, the determinant now of how much U.S. oil will ramp, it's actually the stock market itself and the sort of return expectations of investors and having learned the lesson of the sort of like 2010s that pure volume is not a great

long-term return on investment is super fascinating to me. It's like, we'll drill more when the stock price goes up. is sort of like the opposite of how people think like, oh, the stock market is just, it's just a mirror to what's happening in the real economy. In that case, it is clearly a driver. Oh, totally. I mean, capital markets matter, and this is a really good example of that. The other thing I would say that I really appreciated hearing was his differentiation of, you know, a commodities bull market, the idea of commodities just going up versus a commodity's super cycle. And this idea that ultimately a super cycle is something that's going to come down to physical volume and scale. And so that scale has to come from, you know, somewhere. And he's sort of pinpointed. pointed the idea of scale coming from surging demand from like the sort of, what did he say, lower income class. Yeah, the redistributionary impulse. Yeah. For sure. Which makes a lot of, like, you know, it's about scale. And so it kind of has to be about consumption from like the biggest proportion of the population as possible. Yep. So many interesting points. You know, his point about

how normally like a, you know, a few days without wind in the UK wouldn't be a big deal. But this time, because of the tightness of the market. So many comparisons between what's going on in logistics. Really great getting his perspective on aluminum. Just is a real treat to talk with Jeff. And again, we got to get them back on in like six or nine months. Yeah, we'll make this like every nine months type event. I think that would be good.

Sounds good. Okay. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.

And I'm Joe. You can follow me on Twitter at the stalwart. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.