- The commodity complex is already beginning to rise following oil's upside breakout
- Natural gas is trending higher
- Copper appears to have bottomed
- Wheat and coffee's downtrends are ending
- A secular rise in commodities can happen even in the face of slower economic growth and lower demand
In Part I, we examined the conventional narratives used to explain the price of oil and found that they no longer account for oil’s breakout to a new uptrend. I suggested that financialization and speculation could power oil much higher, despite sagging global demand for physical oil and a potentially deflationary global recession.
This thesis has been met with widespread skepticism when I’ve aired it privately, and I think this skepticism arises from the newness of this narrative. In the past, oil has responded to supply-demand and inflation/deflation. The notion that oil could rise in a finance-induced “scarcity amidst plenty” is neither simple nor intuitive.
If oil tracks higher, we can anticipate that the primary commodities (energy, agricultural, and construction) may well rise, even as end-user demand weakens, as oil underpins all production and transport. The 2.5% rise in producer prices over the past year suggests this is already occurring.
The secondary reason is that lower prices eventually push marginal producers out of business, tightening supply and giving the remaining producers pricing power.
As noted in Part I, regardless of what we see as key drivers or what we think oil “should do,” oil has broken out technically.
Is there any evidence to support the idea that the uptrend in oil will trigger higher prices in other commodities? Let’s start with the CRB (Commodity Research Bureau) index that reflects a basket of commodities…