As China reopens, what’s ahead for commodities in 2023?

Episode Summary

Executive Summary: Goldman Sachs’ Jeff Curry argues commodities remain in a powerful bull setup despite recent declines: a multi-year supply underinvestment, China’s reopening, Europe’s energy normalization, and a weaker dollar could outweigh recession fears. He sees 2023 demand rebounding, Russia supply falling further, OPEC retaining unusual pricing power, and commodities—especially metals—continuing to hedge inflation and market stress.

Main Topics: Why commodities fell after a strong 2022 (Priority: 5/5): Curry says the 2022 rally was not driven solely by the Russia-Ukraine war but by a broader, ongoing uptrend since mid-2020 caused by underinvestment, tight capacity, and post-COVID demand recovery. The war intensified an already tight market and commodities peaked in June 2022. China’s reopening and demand rebound (Priority: 5/5): China’s reversal of zero-COVID, improving mobility, and a property-market policy shift are presented as the biggest positive demand catalyst for 2023. Curry expects a meaningful rebound in oil, metals, and broader commodity demand as China exits lockdown-related weakness. Europe’s energy crisis and warm winter effects (Priority: 4/5): Warm weather and energy conservation temporarily reduced European gas and oil demand, easing prices. But Curry emphasizes the crisis is not over; lack of investment means Europe may face renewed energy stress in winter 2023-24. Recession fears vs. historical bullish setups (Priority: 5/5): Curry downplays recession risk as the dominant base case and compares the current macro setup to 2007: Fed tightening easing, China stimulating, supply underinvestment, and a weaker dollar. He argues this combination is historically bullish for commodities. Supply constraints, Russia, and OPEC power (Priority: 5/5): He expects Russian supply to fall further as sanctions hit refined products and says OPEC now has extraordinary pricing power because non-OPEC capacity is limited. Underinvestment across the industry leaves core Gulf producers as the primary swing suppliers. Capital discipline and decarbonization (Priority: 4/5): Despite high commodity prices, inflation in project costs, depressed equity valuations, buyback preferences, recession fears, and ESG/decarbonization pressures have kept real investment low. This reinforces long-term tight supply across oil, gas, metals, and agriculture. Investment case: metals vs. oil (Priority: 4/5): Curry distinguishes between smoother upside in green metals—especially copper—and more volatile but potentially higher-return oil. He recommends copper and other electrification metals as the cleaner long-term commodity exposure.

Key Arguments: Commodity weakness in late 2022 was driven by China lockdowns and Europe’s energy shock, not just Russia’s invasion of Ukraine. China’s reopening could lift oil demand by 1.5 to 1.82 million barrels per day, a roughly 2% increase in global oil demand. Europe’s warm winter helped, but structural energy tightness remains because only investment in production capacity can solve it. The current macro mix resembles 2007: the U.S. slowing while China stimulates, a setup that historically supported commodity prices. Russia remains an upside risk factor because refined products are harder to reroute than crude, and sanctions on products should reduce supply further. OPEC’s pricing power is unusually strong because non-OPEC and non-core OPEC supply growth has been constrained by underinvestment. Real capital expenditures in the sector fell last year even as nominal spending rose, because inflation eroded investment power. Energy and resource companies prefer buybacks over drilling because share prices remain depressed relative to free cash flow. Decarbonization and higher interest rates reduce the appeal of long-duration new-economy assets, while short-duration old-economy commodity assets become more attractive. Copper and other green metals should benefit most from electrification and policy support, with copper facing a large future supply deficit.

Data Points: Commodity performance in 2022: Best-performing asset class; commodities up 26% while many other assets struggled - Used to frame commodities as an effective inflation and crisis hedge Peak commodity rally in 2022: Up 55% at peak in June 2022 - Referenced as the high point before the second-half selloff China oil demand at start of 2022: About 15.5 million barrels per day - Baseline before lockdown-driven demand loss China oil demand by Jan. 1, 2023: Below 14 million barrels per day - Shows the magnitude of the China slowdown China demand rebound expectation: 1.5 to 1.82 million barrels per day - Expected rebound in oil demand from reopening and property support Global oil demand: Around 100 million barrels per day - Used to show China’s rebound could lift global demand by about 2% European heating demand reduction: 20% in October; 16% in December and January - Energy conservation and warm weather reduced gas demand sharply Russia supply decline estimate: Another 600,000 barrels per day - Goldman base case after product sanctions tighten IEA estimate of Russia supply hit: 1.5 million barrels per day - Mentioned as a more aggressive external estimate Commodity outlook for 2023: Up 43% base case - Curry’s forecast for commodities in 2023 Oil price move during episode: Down 8.5%, then up 10%+ in two weeks - Illustrates oil volatility early in the year Recession probability: Closer to 30% - Economists’ estimated recession odds cited in the discussion OPEC historical comparison: Late 2006/early 2007 - Current setup compared to a prior bullish commodity environment Copper deficit outlook: 15% of the market - Projected future deficit tied to decarbonization demand Legislation support in Europe: RePowerEU at 4 trillion euros - Described as a major policy push for energy transition IRA support for sector: $400 billion earmarked - Used to show U.S. incentives for green investment

Pivotal Quotes: "Historically, this is one of the most bullish environments you can create for commodities." — Jeff Curry: Summarizing the current macro setup of Fed tightening easing, China stimulating, and constrained supply "The only thing that solves this is investment in production capacity. And we're not there yet." — Jeff Curry: Explaining why Europe’s energy crisis is only temporarily eased, not resolved "If I’m a company at this point right now, it’s more profitable for me to do share buybacks than it is to put a drill bit in the ground." — Jeff Curry: Why commodity producers are not rapidly expanding supply despite high prices

Implications: The podcast suggests commodities may remain a strong inflation hedge and portfolio diversifier in 2023, with upside led by copper and other green metals, while oil stays volatile. Structural underinvestment means tight supply could persist even if recession fears rise.