Taps Coogan – August 2nd, 2022
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Jeff Currie, Goldman Sachs global head of commodities, recently spoke with CNBC’s Joe Kernen about his outlook for commodity markets ahead of this week’s OPEC+ meeting. He notes that most commodity markets are not witnessing an actual contraction in demand, just a slowdown in the rate of growth in demand, and that there is a disconnect between physical market tightness and financial market bearishness.
Some excerpts from Jeff Currie:
“We call that (lack of investment by resource producers) the revenge of the old economy… We’re not putting enough money into the old economy and the situation has gotten worse not better with the higher prices.”
“Look at Exxon and its release on Friday. Its free cash flow yield is up there with Microsoft but Microsoft is a $2.1 trillion market cap. Exxon is a $400 billion market cap with essentially the same free cash flow yield… It’s trading with a multiple of around ‘8’ which is an indication that investors do not see a persistency in this problem… It’s the same thing for the commodity market…”
“From a commodity demand perspective, no (we’re not in a recession). If you look at global demand for commodity, oil and metals together, the recession was back in April and May when China went through the severe lockdowns. Demand has rebounded substantially… When we look at the overall demand picture it is still growing and the other point here is that even if we do see a recession, it is likely to be broad based and shallow and that’s very different than what we saw in 2020 which was a pandemic that led to no travelling and a collapse in demand, 2008 which was a financial crisis where credit shut everything down and demand collapsed, and the previous one before that was 9/11 when everybody quit flying. So, we have it in our heads that when a recession happens it is a significant impact to commodity demand but the reality is that if you go back to all those other post-war recession demand didn’t contract like it did in those other ones…”
Sounds about right. Of course, another rapid deterioration in China’s economy is entirely conceivable.
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