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What to expect in 2023: The global economy is struggling to meet its own demand for commodities. Despite last year’s sky-high prices, extractive industries are in no rush to invest in more capacity to ease supply shortages. Without an investment boom, the only way to rebalance the market in the new year is to cut demand.
In fact, an economic slowdown is already underway. The US Federal Reserve, the Bank of England and the European Central Bank are stepping on the brakes with higher interest rates. The UK economy is already in recession and Europe is heading towards a cliff. The US oscillates between a soft landing and a hard landing. But even if macroeconomic forces ease some of the pressure on commodity costs, microeconomic factors such as low inventories and limited spare capacity will keep prices higher in 2023 than in previous recessions.
Since peaking in June, the Bloomberg Commodity Spot Index is down about 20%. But the basket, which tracks the price of more than two dozen commodities, is higher than when it peaked in 2008 and 2011. Oil has fallen from a peak of more than $125 a barrel in early 2022 to around $80 a barrel by End of the year – but the price remains well above the low of just over $35 a barrel set in December 2008. The same applies to other commodities, from copper to coal and from wheat to tin. The commodity boom is taking a break, it is not ending.
The resilience speaks volumes about the power of these microeconomic factors and the need to spend more on production. However, Wall Street is unlikely to give the green light for a spending spree unless prices stay elevated for longer. After suffering heavy losses over the past 10 years, shareholders want dividends and share buybacks, not new projects. Hardcore ESG investors are dead against supporting new fossil fuel projects and large mines.
For now, the macro bears are calling the shots. But once the economy bottoms out, perhaps as early as late Q2, and shows signs of renewed life, the micro-bulls will exact their revenge. The commodity boom will only end when investments in new projects pick up significantly. But that won’t happen in 2023. From the year behind us: Many winters are coming. Start saving energy now: For months, European leaders underestimated the magnitude of the energy crisis they are facing. By early summer it was clear that difficult times were ahead for the continent. And it did.
Listening to the electricity traders is really scary: the inside story of how the people who trade electricity in the UK view the energy crisis – their worries, hopes and fears.
Sorry, but for you, oil is trading at $250 a barrel: While everyone was looking at Brent and WTI prices, the real action has been in the diesel and jet fuel markets where prices are, to put it simply, crazy became.
London paid a record price to dodge a blackout: the lights stayed on in Europe, but the cost was sometimes staggering. Unknown to many but few in the industry, disasters have at times been avoided by a very small margin.
Look at all the money Cargill made last year: Despite the political focus on Big Oil, commodity traders were among the biggest winners of the 2022 crisis in markets from natural gas to wheat.
The toilet paper crisis shows that inflation is still a mess: The highest inflation in 40 years, seen through the lens of an everyday product: toilet paper. Demand is inelastic, supply has been constrained. The prices jumped.
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor for the Financial Times, he is a co-author of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.
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