Commodities Outlook: Return of the New Oil Order

Episode Summary

Executive Summary: Jeff Curry argues the 2018 commodity sell-off was driven less by deteriorating fundamentals than by unwinding over-optimistic “global synchronous growth” sentiment. He sees 2019 as supportive for oil, metals, and gas thanks to a Fed pause, weaker dollar, OPEC cuts, China stimulus, and shale de-bottlenecking—though he warns that uncertainty is suppressing long-cycle investment.

Main Topics: 2018 commodity volatility: fundamentals vs sentiment (Priority: 5/5): Curry says the late-2018 sell-off began with oil market surprises around Iranian exports, then broadened into a sentiment-driven repricing across commodities, equities, and credit as overly bullish growth expectations were unwound. Shale and the “new oil order” (Priority: 5/5): He explains how fast-cycle shale flattened the oil supply curve and constrained OPEC’s ability to manage prices. Pipeline bottlenecks in the Permian temporarily muted shale’s impact, but he expects renewed shale growth as infrastructure improves. Oil outlook for 2019 (Priority: 5/5): Goldman lowered its 2019 Brent forecast because of excess inventory from misjudged Iranian sanctions timing and because shale de-bottlenecking should increase supply. Still, the macro backdrop, OPEC cuts, and China stimulus make him constructive on prices. Demand cycle, dollar, and the “terrible trio” (Priority: 4/5): Curry argues the market misread 2018 as late cycle when it was more mid-cycle. A Fed pause and a weakening dollar are now supportive, while last year’s combination of rising rates, a strong dollar, and higher oil hurt emerging markets and demand. Natural gas and metals (Priority: 4/5): He sees natural gas moving toward a long-term surplus price near $2.75/MMBtu as new pipelines come online. For copper and aluminum, tariffs and trade war pressure pushed prices toward cost curves, but China stimulus and a weaker dollar could lift them. Geopolitical risk and policy uncertainty (Priority: 4/5): Trade tensions, foreign policy surprises, and the U.S. shutdown are dampening confidence and long-cycle investment. Curry expects trade to eventually produce a deal because both sides face material damage from slower global trade. Cryptocurrency vs gold as stores of value (Priority: 3/5): Curry reiterates that crypto’s extreme volatility makes it a poor store of value compared with gold, which has deep institutional support and 3,000 years of history.

Key Arguments: The 2018 commodity decline was more an unwind of excessive optimism than evidence of a collapsing economy. Shale has structurally changed oil markets by flattening the supply curve and forcing OPEC to react faster. Pipeline bottlenecks temporarily paused the “new oil order,” but new infrastructure should restore shale growth. Oil forecasts were cut because Iranian-sanctions-driven supply builds left excess inventory and because shale supply should increase. The current environment is supportive for commodities: the Fed is on hold, the dollar is weaker, positioning is light, OPEC is likely to cut output, and China is likely to stimulate. The old late-cycle demand boom did not materialize; 2018 oil demand growth was closer to the post-crisis average than to a late-cycle surge. The “terrible trio” of higher rates, a stronger dollar, and higher oil is especially damaging to emerging markets and can signal a mid-cycle pause or recession. Commodity markets are increasingly spot-driven because uncertainty discourages forward commitments and long-cycle investment. Natural gas prices should converge toward long-term surplus levels as pipelines and supply come online, even if front-end shortages cause short-term spikes. Crypto is too volatile to function as a reliable store of value; gold remains superior due to stability and long historical acceptance.

Data Points: Oil price (current in transcript): ~$60/barrel - Curry uses this to show prices have reverted to late-2017 levels after the sell-off. Copper price (current in transcript): ~$6,000/ton - Used to illustrate that copper has also returned to roughly late-2017 price levels. Average equity valuation (post-crisis): 14.5x - He says valuations fell back to the long-run post-crisis average during the sell-off. 2019 oil price forecast revision: $70 to $62.50/barrel - Goldman cut its 2019 price view due to excess inventory and shale de-bottlenecking. Oil demand growth forecast a year earlier: 1.8 million barrels/day - Initial bullish demand expectation before 2018 data disappointed. Actual/updated oil demand growth: 1.5 million barrels/day - Curry says demand growth ended up near the post-crisis average. Post-crisis average oil demand growth: 1.5 million barrels/day - He notes the realized demand rate matched the historical average. China growth threshold: 6% - He says China needs roughly 6% growth to meet its 2020 policy objectives. Current China growth: Low fives - He characterizes Chinese growth as below target, implying policy stimulus. Global trade growth: From ~6% to ~3% - Evidence that trade tensions are materially slowing trade activity. Natural gas current price: ~$3/MMBtu - He says the market is near but above the long-term surplus level. Natural gas long-term surplus price: $2.75/MMBtu - Goldman’s year-end 2019 target for natural gas. Copper target price: $7,000/ton - He identifies copper as a stronger bullish view for 2019. Volatility in cryptocurrencies: Hundreds of percent; collapses by 50% - Used to contrast crypto instability with gold’s steadier moves. Gold price move in cited periods: 5-10% - Shows gold’s relative stability as a store of value. Commodity market investor share: ~15% - Curry argues investors are a minority of market participants. Producer share of open interest: ~50% - Producers hedge physical exposure and dominate futures participation. Consumer share of open interest: ~35% - Consumers such as airlines and manufacturers hedge demand risk. Passive investor share: ~10% - Most investor participation is index/passive commodity exposure. Active hedge fund share: ~5% - Small share of market but about 75% of trading volume. Oil market inventory shock timing: Nov. 2018 - Curry says precautionary buying ahead of anticipated sanctions created excess supply once the impact proved smaller than expected.

Pivotal Quotes: "We just essentially unwound all that exuberance over that time period." — Jeff Curry: Explaining the 2018 commodity sell-off as a reversal of inflated sentiment rather than a fundamental collapse. "Long-term surpluses create near-term shortages." — Jeff Curry: His core framework for natural gas pricing and supply dynamics as new pipelines come online. "Spot prices solve surpluses. Forward prices solve shortages." — Jeff Curry: Describing how market structure and pricing signals differ when supply is abundant versus scarce.

Implications: For 2019, commodities look supported but uneven: oil and metals benefit from macro tailwinds and policy support, while gas trends toward surplus pricing. Investors should expect continued volatility, lighter long-cycle investment, and prices shaped by policy, trade, China, and dollar moves.