We’re in the middle of a once-in-a-generation commodity rally.
The world needs commodities, from wheat and maize to nickel, gold, and oil.
The post-pandemic recovery is here. But it can’t take off in earnest because, put simply, there’s not enough supply of almost anything.
Global supply chains are undergoing a massive redesign. Commodity consumers need to be able to buy what they need when they need it. And right now, it’s a challenge.
As a result, some countries started supporting the domestic production of metals and other critical materials.
But this kind of turnaround takes time. And in the meantime, the world remains in a state where prices on most production inputs and goods are soaring.
Even money is becoming more expensive with the Federal Reserve increasing interest rates in the US.
How should investors navigate this market?
And where is it going?
Below, we will outline our cases for two commodities that are on our radar: oil and uranium.
These markets are part of the global commodity rally. And we believe that there could potentially be quite a lot of upside left.
Oil to $250?
The war in Ukraine has rattled the oil market.
And it was already hot before the Russian invasion.
In 2021 alone, the crude oil price had increased by 55%, driven by the post-pandemic recovery.
And so far this year, it soared by an additional 51%.
Earlier in March, it reached $123.70 per barrel, a multi-year record.
However, this year the oil rally could, in our view, continue.
Some of the world’s top traders have predicted that oil could reach $250 per barrel by the end of 2022.
Pierre Andurand, one of the best-known hedge fund managers in the sector, made this prediction earlier this month.
“This is going to be a crude supply shock,” says another trader.
The global supply and demand of oil can’t be adjusted instantly. The rebalancing can take up to 18 months and possibly longer.
It means that in the meantime, the market will work with what it has now. Massive demand and restricted supply.
The sanctions levied on Russia are one part of the problem. The country has become a pariah in the West, which doesn’t want to purchase its oil or gas anymore.
In fact, Germany has just announced that it would cut its reliance on Russian gas almost completely by the end of 2024. And the German government said that it would become essentially “independent” of Russian oil by the end of this year.
While the oil market rebalances itself, the price of crude will enjoy massive support, in our view.
And we will not be surprised to see it shoot to $250 a barrel. Possibly, even higher.
Uranium to $100?
Uranium has also been setting multi-year records recently. And, in our view, its price still hasn’t peaked.
The Wall Street Journal reported that the price of uranium oxide soared to $57.50 recently.
Since the Russian campaign in Ukraine began on February 24, they rose by one-third.
To secure enough uranium, US companies that would purchase uranium ore from Russia are turning elsewhere. The threat of “secondary sanction” makes them cautious.
As a reminder, “secondary sanctions” are those that apply to the governments and companies who trade with a sanctioned entity. In other words, they make the sanctioned entities “toxic.”
As a result, if someone wants to buy uranium ore, they need to seek out other trading partners.
Add this factor to the biggest megatrends that we are seeing—ESG and the “green revolution”—and we’re looking at a massive spike in uranium demand.
RBC analysts estimated that because of the Russian sanctions, the US demand for uranium could spike by almost one-third.
Elsewhere in the world, the situation is just the same. Europe is getting rid of hydrocarbons and giving nuclear power another chance. It could invest up to $55 billion into the nuclear industry by 2030, says Anna Bryndza, executive vice-president of UxC, a research company.
Belgium, for example, has postponed the gradual phase-out of its nuclear power plants by ten years. France is building six new power plants.
As with oil, the full impact of the new Russian sanctions will be understood only in a few months.
But in the meantime, investors should consider these trends and get ready to take advantage of them.
Thank you for your loyal readership,The Financial Star team
