Commodity Cycle and Recession

Jun 23, 2023

I'm wondering if the current situation will lead to a disaster by the end of the year. Several factors are occurring simultaneously, seemingly pointing in that direction:

  1. Supply drawdown in oil will likely result in higher oil prices. Oil inventories are being reduced, and as interest rates increase, the cost of storing oil becomes more expensive. Consequently, there is a general decline in oil prices as these inventories are sold off. However, production isn't keeping up with filling those inventories, which will likely lead to higher prices later this year. An important consideration that hasn't been addressed is that Europe hasn't resolved its energy issues; favorable weather conditions have merely provided temporary relief last year. Saudi Arabia's 1 million barrels per day (mpd) cut will also likely affect things by end of summer.
  2. Food prices are increasing due to various factors. The Midwest is experiencing a severe drought, floods have rendered much of China's wheat unusable for human consumption, Ukraine's grains are being destroyed or facing export difficulties, Russia is having a poor harvest, and India's grain production is approximately 10% below reported numbers. As a result, food prices will likely rise further.
  3. Student loan payments will resume in October. The pause on loan repayments has likely increased market volatility and attracted many retail investors to the equities market. However, once repayments begin, capital will likely be diverted from the market. Further, a lot of spending will curtail as people are not going to give up price inelastic things such as gas and food.

Taken together, these factors suggest that we may be headed towards a recession while simultaneously experiencing higher food and energy prices. Considering the 2008 meltdown was started by higher food and oil prices, this doesn't bode well to avoid a recession....