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INTERVIEW: Hang on for wild oil, copper ride in commodity supercycle: Goldman's Currie

Highlights

Oil has a 'lot of upside', copper prices already at supercycle levels

Supercycle reminiscent of 1970s spike rather than 2000s bull run

Supply crunch could play into shale, core OPEC+ hands

New York — The oil market is being swept up in a commodity supercycle, with huge upside risk to a target price of $65/b, according to Jeff Currie, head of commodity research at Goldman Sachs, who added key metals such as copper are already at supercycle levels and that the story has only just begun.

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"I want to be long oil and hang on for the ride," Currie said in an interview with S&P Global Platts on Feb. 5, warning "there is a lot of upside here."

"Is it back to $150/b? I don't know... as it is a macro repricing we are talking about and everything needs to reprice."

The Dated Brent oil benchmark is currently above the $60/b mark, up more than $20/b from November levels, while copper and iron prices have hit highs this year not seen since early last decade. The LME cash copper price is north of $8,000/mt, while S&P Global Platts assessed the 62% Fe Iron Ore Index at $165.95/dry mt CFR North China on Feb. 10.

Currie, who called the supercycle in the early 2000s, highlighted the importance of the interconnections between the key commodities like oil and industrial metals in driving prices higher, arguing that oil prices cannot be considered in isolation.

"This is why I jump up and down and pound the table that people don't keep talking about iron ore with your oil outlook. Well, it's really important to your oil outlook. So is the dollar, so is copper, and grains... So is everything else out there," Currie said.

He noted that copper is crucial to the oil outlook. While Goldman has a copper target of $10,000/mt, which is consistent with its $65/b oil price, Currie speculated as to whether copper could actually reach $40,000/mt at some point.

"We have no copper, copper inventories just drew their largest observable draw we've seen in the last five weeks, prices are already back to supercycle levels and we have not even started the energy transition story of electrifying the world," Currie said. "Copper is the only thing we know that can conduct electricity at the rate needed, so I'm really curious as to how high some of these markets can go," he added.

Supercycle origins

Currie explained that we are seeing a supercycle emerge because of a "structural upward shift in demand." He emphasized that energy transition is at the heart of this transformation because of all the green capital expenditure that is required to be able to create the electrification the globe needs.

Currie noted the shift in demand has three elements, which he termed "REV" -- standing for redistribution policies, environmental policies and versatility in supply chain initiatives.

He also suggested that this supercycle is more akin to the one seen in the 1970s rather than the start of the century. Tensions around poverty and social unrest that led to redistribution efforts and the war on acid rain back then compares to the climate change pressures today. Meanwhile, regarding supply chains, Currie said the US Cold War with Russia can be viewed with a similar eye to the issues between China and US.

"Last summer it was the Chinese buying strategic reserves of grains, copper, oil. And when we think about when did the Europeans and the Americans build all those strategic reserves, it was built in the 1970s, under very similar circumstances," Currie said of the parallels.

Talking specifically on oil, Currie noted perhaps counterintuitively that the massive green spending stimulus will have an indirect pull on oil demand given the energy needs surrounding the whole enterprise.

"And let's remember, what's unique about this is everybody everywhere in the world is doing the exact same thing at the exact same time, which is why you get that immediate impact on demand," he added.

Chris Midgley, head of analytics at S&P Global Platts, has also noted that "the market certainly feels like it is moving into a supercycle -- commodities across the board including coal have risen over 20% since the end of Q3... demand is recovering but still lags well behind 2019 levels and headwinds remain with high infection rates, new strains of the virus and further lockdowns."

However, he added that it may be "a little early to declare a full supercycle."

OPEC, shale

Currie warned that demand concerns for oil longer-term will deter investment in long life cycle production paving the way for key OPEC and US producers.

This "hostile environment to attract capital" will mean the "only investment that's going to go into this space is going to be very short cycle production in places like the Middle East, as well as the United States in the shale patch," Currie said.

Currie added that these conditions are going to push up the cost of capital in these areas too.

Taking the example of shale, Currie said these producers over the last decade have been spending "130% of cash flow, because of access through debt and equity markets," but noted that "they're going to be lucky if they could spend 70% of cash flow," with reduced access.

"This means that the hurdle rate of which they can actually now begin to drill is at a much higher price, instead of being at $55/b, we think it's closer to $65/b, which is why we're sitting... in an environment where we have not seen an uptick in drilling -- historically, by the time we got to $55/b that would have already happened," Currie said.

Platts Analytics sees US drilling and completion activity continuing to rise with the improvement in oil prices over recent months. "Still, we do not see major changes to US supply expectations because operators will maintain capital discipline in 2021," it said in a research note.

But Currie was also keen to point out that the outlook for non-core OPEC+, namely those outside the core Gulf countries and Russia, is less assured.

Once the demand recovery really takes off, Currie believes the "dynamic that's keeping that cohesion between Russia and OPEC is likely to disappear. I would tend to think that it's going to be a free for all."

And any return to pump-at-will by the OPEC+ participants would likely see US shale's role as the marginal supplier resume.