The Case for Commodities: ‘Super-Backwardation,’ Structural Demand and Inventory Shortages

Episode Summary

Executive Summary: Jeff Curry argues commodity prices are surging because physical markets respond to current demand, not slowing growth expectations. Despite hawkish central banks, demand remains strong in the U.S. and China, while supply is constrained by years of underinvestment, weak returns, ESG pressure, and low inventories. He sees the rally as structural and potentially prolonged, with oil, metals, and agriculture all vulnerable to further upside and volatility.

Main Topics: Why commodities are rising despite slower growth (Priority: 5/5): Curry explains that commodities are spot assets driven by the level of demand, not the growth rate of demand, so slowing macro growth does not automatically weaken prices if absolute demand remains high. Severe supply constraints across commodities (Priority: 5/5): Years of poor returns, limited CapEx, ESG-related capital constraints, and low inventories have left energy, metals, and agriculture underinvested and unable to quickly respond to higher prices. Oil market tightness and bullish price outlook (Priority: 5/5): He argues OPEC and other producers have limited spare capacity, inventories are low, and the oil market is in deep backwardation, supporting Goldman’s $105/bbl second-half forecast with upside risk. Ukraine/Russia and agricultural and energy risk (Priority: 4/5): Curry says energy trade disruption is unlikely because Russia and Europe are mutually dependent, but the conflict could still create accidents or disrupt grain shipments from Ukraine, especially wheat and corn. The commodity supercycle framework (Priority: 5/5): He links the current rally to prior supercycles driven by frothy equity markets and capital misallocation away from the old economy, combined with new demand from China-style industrial growth and post-COVID policy shifts. Decarbonization and structural metals demand (Priority: 5/5): The transition to green investment is expected to require massive amounts of copper and aluminum, making metals a central beneficiary of climate policy and long-duration capital spending. Commodities as portfolio hedges and asset-class allocation (Priority: 4/5): Curry says investors remain underexposed to commodities despite rising inflation risk and argues physical commodities are the most direct hedge because consumers must buy them in the real economy.

Key Arguments: Commodities are spot assets, so prices reflect current physical demand rather than forward-looking market expectations like equities and bonds. The U.S. remains stimulative and China is re-accelerating, so demand levels are still rising even if growth rates slow. Supply is structurally constrained because capital has not flowed into greenfield drilling or mining after years of poor returns and ESG-led divestment. Inventory levels across the commodity complex are near critical lows, making markets sensitive to small disruptions. OPEC’s reported quota increases overstate true supply gains because only a few producers can actually add barrels meaningfully. Oil could become spiky again if spare capacity is exhausted, similar to the 2004-2008 period. Ukraine poses more risk to agricultural supply than to intentional energy disruption, though accidents could still rattle energy markets. The current move is part of a broader supercycle driven by capital misallocation, inequality-focused policy, decarbonization, and deglobalization. Lower-income groups drive volumetric commodity demand, so redistribution and pro-consumption policy can support physical goods inflation. Copper and aluminum are positioned to benefit most from decarbonization because green infrastructure requires enormous amounts of metal. Commodities are underowned in portfolios, and physical commodities may be the best inflation hedge because actual consumption creates forced demand.

Data Points: Brent crude price: above $90 per barrel - Current oil price level at the time of the podcast Goldman oil forecast: $105 per barrel in the second half of 2022 - Jeff Curry’s team forecast for oil prices Oil price history reference: negative 22 in 2020 - He cites oil trading below zero during the pandemic shock as a factor still shaping investor memory Commodities-related investment in 2021: $300 billion - Curry says this was the amount going into commodity-related investments, mostly ESG ESG share of commodity-related investment: $299 billion of $300 billion - He uses this to argue that capital was directed away from traditional fossil-fuel supply OPEC announced increase: 400,000 barrels per day month over month - Reported rebalancing increase discussed in the interview Estimated realized OPEC increase: closer to 280,000 barrels per day - Curry says actual output gains are lower than announced quotas U.S. crude production gap: 1.5 million barrels per day below January 2020 - He notes U.S. supply is still well below pre-COVID levels Commodity universe covered: 27 commodities - He says all are in deficit with declining inventories Corn target: above $6 per bushel; around $7 per bushel forecast - Goldman’s view on corn prices amid tight inventories and weather risk Green investment CapEx this decade: upwards of $16 trillion - Expected additional capital spending tied to decarbonization Global AUM: $250 trillion - Used to illustrate potential commodity allocation if just 1% were invested Current commodity investment pool: around $225 billion - Curry says current investment in the space is very small versus potential demand

Pivotal Quotes: "Commodities are spot assets. They’re not anticipatory assets like financial markets, particularly equities." — Jeff Curry: Explaining why commodity prices can keep rising even as growth expectations slow "The only cure for those imbalances is higher prices." — Jeff Curry: Describing persistent supply-demand deficits across the commodity complex "Copper is the new oil." — Jeff Curry: Highlighting copper’s central role in decarbonization and future industrial demand

Implications: The episode suggests commodities may stay elevated and volatile because structural demand and supply shortages persist. Investors may need greater commodity exposure, especially to physical goods and key metals, as inflation and decarbonization reshape portfolios.