War, Inflation, Oil & Natural GasSince the early 2000s commodities have had a major boom, a major bust and another boom which began in April 2020. The current boom isn't caused by the world going into the right direction and economies are booming, but rather we have major issues in the production of commodities. Globalization led to a massive economic boom post WW2, a trend that slowly started reversing since 2008, accelerated a bit in 2020 due to Covid and now has massively accelerated due to the Russia-Ukraine conflict. This boom to a large extend relied on the financialization of the economy and the outsourcing of production on emerging markets, most of which don't align with western values and tend towards authoritarianism. This essentially lead to huge underinvestment in the production of commodities in the 'west' and heavy dependence on the 'east'. As the world is de-globalizing inflation has become a problem for everyone, but mostly for the developed world which now seems to be at odds with the developing world.
Unfortunately, the Russia-Ukraine conflict is the continuation, or I should say the real 'breakout' into a new world order. A reset was going to come, tensions were going to rise and things would eventually get at this stage. It's in the nature of human beings to repeat the same mistakes over and over again, and as technology is progressing these mistakes tend to be more destructive and costly. Personally, I see no way how this situation gets resolved peaceful and doesn't result in the world being heavily divided in two camps, one US centric and one China centric. The next 10 years are probably going to be very turbulent, with all sorts of problems arising and the world going through some very dark times, yet I also think that after that period we going to come out of it stronger and potentially have another massive boom. It's currently all a matter of surviving over the next 10 years monetarily, physically and mentally... because we are about to go through a really rough period where inflation gets totally out of control, especially in nations that don't produce enough of their own food and energy.
There are multiple reasons as to why inflation is going to ravage the world economy, but the key ones will be higher energy prices, broken supply chains (dysfunctional trade), freeze or reduction in production of certain goods in countries like Ukraine or Russia. What is going to exacerbate the problem but at this point is a necessary evil, is the insane amount of money printing in order to cover all sorts of deficits and provide people with support. In my opinion and I've talked about extensively before, is that raising interest rates in this environment will do nothing to stop inflation. What the public and private sector really needs to do is relax regulations and provide all sorts of help to producers, so that each country can get as much autonomy as it can get. Doing whatever it takes in order to produce as much energy and food, as it really is a matter of national security.
A few weeks ago, it looked like inflation was going to come down. There wasn't much liquidity in the markets and all sorts of issues started showing up. Like I had mentioned in my previous ideas, inflation was due to several issues that had nothing to do with QE and ZIR, but due to issues on the supply side. It started looking like the Fed wouldn't need to or wouldn't even be able to raise rates more than 1.5-2%. However, then the conflict broke out and everything changed completely. Now the inflation caused by non-monetary issues has gotten completely out of hand, with no end in sight. Even though the issue is mainly on the supply side, it is a very tough one to fix and it is one that needs a lot of time to fix... while in the meantime intervention by money printing, wars and so on, will most likely make things a lot worse. So instead of the markets finding some sort of balance as low supply slowly crashes demand until production ramps up, we could see things get completely out of hand as the monetary systems breaks down along with production and distribution of goods, energy etc.
In this analysis I won't get into any commodities other than Oil and Natural let's get into the charts and take everything step by step. Starting with oil, it is very clear that the market is extremely overbought, but at the same time it looks like it has also had a major breakout. Based on all metrics it is the most overbought it has ever been, yet at the same time its uptrend is very clean and strong. Since its December low the price of oil has doubled, and since the low on Feb 25th after the war broke out, it went up 40%. Currently it is just 20% away from making a new ATH, so I wouldn't be surprised if it goes 2x above its previous ATH in the next few months. Essentially we are seeing a reverse capitulation of what happened in April 2020 when oil went to -40$/barrel on the front contract. That ended the oil bear market as it forced a lot of producers to shut their oil wells and flushed out speculators. So high could oil go? Is there a limit? Although there is no limit to the upside due to the potential devaluation of fiat currencies, the truth is that higher prices are the cure for higher prices. Higher prices incentivize producers to start producing a lot more, and will probably make all the environmental concerns go out of the window, hence allowing all sorts of 'bad' for the environment energy sources to be used by everyone. What is actually even more likely is that such high oil prices will make the global economy collapse, which will in turn lead into a collapse in demand for oil. But again... How high can its price get? Based on the previous two largest Oil rallies, as well as based on technical analysis & fractals, the absolute top could be at 440-550$/barrel if things get extremely bad (ceiling), while 250-300$ is more likely to be either the top or a local top for quite some time.
So far we have spoken about the upside, but there is also significant potential for downside here before the bull trend continues. I don't think it is very likely, yet it is possible. Volatility on energy could get wild based on how fast the output is increased, while demand drops. The current trend can't and won't last forever, as we can't leave so many gaps behind without one day retesting them. Definitely wouldn't rule out a 2008 style crash on oil at any moment, however for now 75$ seems to be the floor, the same way 60$ was the floor in Q3-Q4 2021. Getting back to 40$ is also possible, but this one would definitely requite a 2008 style crash. Therefore on the one hand the potential upside is about 85-335%, while the downside is 35-65%.
Now it's time to talk about Natural Gas, as this is another really major component of the inflation equation, especially in Europe. Russia is the largest supplier of Natural Gas to Europe, which has been paying more and more for NatGas to Russia, and the situation is getting worse by the day. Someone could say Russia is holding Europe as a hostage, because Europe really really needs that gas as many people use it for heating, cooking and energy production. As its price was low for so long, people believed it would be cheap forever and started using it more and more. Unfortunately now it isn't easy to go back to using other sources of energy and Europe is really far way from only using clean/green forms of energy. Unless it moves quickly back to nuclear energy (re-activating reactors), coal and even getting natural gas from the US or somewhere else if possible, Europe is going to having blackouts for a long time. Not only will there be blackouts, but it will be pretty much impossible for anything to function properly.
The situation in Europe is totally different from that of the US, whose NatGas prices are about 15 times lower than the ones in Europe. That's because the US is producing its own and doesn't rely on other countries for it. It is also producing substantial amounts of oil, while many countries around it (i.e. Canada) also produce a lot of oil. The high dependence on Russia is putting a lot of pressure on Europe, which might not be able to grow at all for many years to come. What is interesting is that this situation is making Europe come together under a common threat, but it also somewhat benefits the US as it gets closer to Europe. Although I don't know how long would it take for this to work and if it is actually possible, but if the US starts exporting LNG to Europe, this could push the price of NatGas in the US up, and that in Europe down. This could eventually become a great trade (long NatGas in the US and short in Europe), but it might take quite some time. Like with Oil, TTF could go up another 2-5x before it rolls over, while NG barely looks like it could reach its previous ATHs. The higher oil goes and the higher the costs in Europe, the more likely it is that NG will go higher. It has formed a decent base and it looks bullish, just nowhere near as strong as the other two.
