Investing Thoughts, April 8 2022

Commodities have room to soar by another 40 percent on top of the gains in recent months, as investors could pour more money into raw materials as a hedge against the highest inflation in 40 years, JPMorgan Chase & Co says.

“In the current juncture, where the need for inflation hedges is more elevated, it is conceivable to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous highs,” JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note to clients this week, as carried by Bloomberg.

Higher money allocations to the commodities asset class “would imply another 30% to 40% upside for commodities from here,” all else being equal, JPMorgan noted.

So far this year, commodities have rallied amid supply constraints, exacerbated by the Russian war in Ukraine. Brent Crude prices have rallied by 30 percent year to date and reached their highest price since 2008 in March when panic gripped market participants.

Key metals have also rallied amid high demand in the energy transition and concerns that supply from Russia—a major producer of some of those metals—could be disrupted in the wake of increasingly tighter sanctions against Moscow.

Prices of lithium, a key component of EV batteries, have nearly doubled this year as commodities soared after Putin’s invasion of Ukraine.

Now JPMorgan says that commodities have further room to rise.

Particularly for oil, Goldman Sachs is also bullish. There is “absolutely” a supply problem in the sector, Jeff Currie, global head of commodities at Goldman Sachs, told Bloomberg on Wednesday.

There are broad-based supply constraints in oil producers, particularly non-core OPEC, Currie said. Every producer except for Saudi Arabia and the UAE is producing less today than they were in 2020, he added. Throw in the Russian shock, and the supply constraints are the most severe in decades, since the 1970s, according to Currie.

The record release of U.S. Strategic Petroleum Reserve (SPR) “is still insufficient to be able to deal with the scale of the problem,” he noted.

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