Commodities face recession test even as Goldman Sachs stays bullish

Commodities are hitting powerful headwinds after a first half dominated by the supply turmoil and inflationary shocks unleashed by Russia’s attack on Ukraine. Below, What to Watch looks at what the second half holds for raw materials from natural gas and crude to grains, gold, iron ore and lithium. 

Across markets, there’s growing talk that high prices for raw materials will be cured only by recessions in the second half. Oil has sunk toward $100 a barrel, metals are poised for a deep quarterly slump, and there’s a cool-off in crops. 

But the bearish view will tested. Goldman Sachs Group Inc. — among the more bullish commodity-watchers — just said prices haven’t yet topped out. That’s even with Bloomberg’s index of spot commodities down 13% from a record. 

“We agree that when the economy is in a recession for long enough, commodity demand falls and hence prices, fall,” analysts including Jeffrey Currie wrote in a note. “Yet we are not yet at that state, with economic growth and end-user demand simply slowing, not falling outright.” 

"Even if we don’t feel it yet, we are in a gas crisis,” Germany’s Economy Minister said last week. Russia’s squeeze on flows to Europe risks a historic global shortage — and higher prices still — with peak demand looming this winter. Consumer nations are preparing to run economies without the fuel, and competition for liquefied natural gas between Europe and Asia will intensify — all the more so if a key US export plant stays shut. 

Expensive gas will increase power bills for households and businesses, and a full-blown crisis would shut industries from chemicals to fertilizers, fanning the flames of global inflation. Germany is preparing to trigger the next stage of its emergency plan, and gas rationing across Europe is a real prospect. In Japan, one of the world’s top LNG importers, the government is trying to curb consumption and is considering unprecedented moves to procure more fuel.

Is the food crisis past its worst? There’s growing talk that grains and cooking oil prices have peaked — and maybe global food costs have too. More supply is on the way, with winter wheat harvests getting under way in the northern hemisphere, and spring wheat, corn and soybeans following later. The focus then turns to production in Australia, Brazil and Argentina. Barring weather woes, output could rise as farmers plant more in response to elevated prices. 

Global stockpiles will remain crimped in the coming season — and millions of tons of grains are stuck in Ukraine — but they may not get substantially tighter. 

Some Ukrainian cargoes are reaching Europe, while Russia is heading for a bumper crop. Palm oil, the world’s most consumed edible oil, just slumped to its lowest level this year as top producer Indonesia ramps up exports, while wheat, corn and soybeans have tumbled from their highs. Global food costs have already fallen from their all-time peak in March, and more declines could follow.