A rebound in global demand following the pandemic, chronic supply chain shortages and sanctions against Russia due to the country’s invasion of Ukraine have caused commodity prices to soar. With oil now approaching $130 a barrel, Business Insider recently turned to Axonic Capital Director of Research Peter Cecchini for insight on how this commodities rally may impact investors.
According to Cecchini, with oil and other commodities surging, stagflation is on the table. “In history, whenever we see an energy shock that is this extreme, it results in significant slowdowns and/or recessions within six months,” he tells the publication.
Inflation also may accelerate even more if commodity prices do not slow down, causing the U.S. Federal Reserve to tighten monetary policy more aggressively than initially planned. “Through the demand elasticity function, that’s either going to slow things down on its own, or it’s going to force additional actions by the Fed,” says Cecchini.
With the commodities rally showing no sign of slowing down due to the war in Ukraine, Cecchini remains bullish on commodities. “I think that commodity equity calls remain intact, as does a pretty bullish call across commodities, whether it’s oil or wheat or soy or meat products as part of that value chain.”
However, Cecchini still urges investors to remain cautious. “Staying long in commodities is going to work for a bit longer until it doesn’t, meaning at some point, commodity prices get high enough that demand falls off a cliff. Then commodity prices collapse, and that’s always the way the cycle works,” he explains. “It’s like a game of musical chairs; you don’t want to be the guy or girl who’s caught standing when the chair gets pulled.”