Morgan Stanley's Sharma Sees `Long Winter' for Commodities

Updated on
  • Brent oil prices will range from $35 to $70 for `many years'
  • Producers maintaining output as weak currencies keep costs low

The commodities bear market may last for many years, with oil dropping as low as $35 a barrel, as production cuts haven’t been sufficient to wipe out the global surplus, according to Morgan Stanley Investment Management Inc.

China’s industrial slowdown is weighing on demand growth while a drop in currencies including the Russian ruble has shielded some companies from lower oil prices, deterring them from cutting output, Head of Emerging Markets Ruchir Sharma said.

“A long winter in commodities is what we have to be prepared for,” he said by phone from New York. “From places like Russia to Australia the currencies have fallen a lot and so the marginal cost of production for some of these commodities in those countries hasn’t fallen that much.”

The Organization of Petroleum Exporting Countries is pumping oil near a record following the group’s decision last year to protect market share by maintaining volumes. Among non-OPEC nations, the U.S. expects output this year to be the highest since 1972. Russian production reached a post-Soviet high in 2015 as a weak ruble cut costs while taxes adjusted to lower prices.

Russian Resilience

The ruble has lost 10 percent against the U.S. benchmark this year. Russian oil producers are generating cash as if the price of oil were still $100 a barrel rather than $50, Goldman Sachs Group Inc. said in a note on Sept. 1.

“They are unlikely to cut their production any time soon because the currency has fallen so much,” Sharma said.

A 200-year history of commodity prices shows they typically move between a decade of bull market and two decades of a bear market, according to Sharma, who helps manage $25 billion at Morgan Stanley. It takes many years to clear the additional capacity that a bull market generates, he said. 

This time around, the slowdown in economic growth in China, the world’s biggest buyer of raw materials, will continue to erode oil prices that surged in the mid-2000s.

China’s 7 percent economic growth in the first and second quarters of this year was the slowest in almost six years. No other emerging-market nation has the demand to fill the gap left by that slowdown, Sharma said.

“China continues to be the central player as far as demand is concerned,” he said. “Even if the Chinese economy stabilizes, the industrial part of the economy is likely to be much weaker.”

Goldman Sachs said Friday that the endurance of the global oil surplus could push prices down to $20 a barrel. That compares with West Texas Intermediate crude at about $44 on Monday and Brent at about $47.

The Bloomberg Commodity Index has declined 27 percent in the past year. Brent has dropped more than 50 percent. The international oil benchmark will average $73.05 a barrel in 2018, according to 13 analysts surveyed by Bloomberg. That’s lower than the $79.16 estimate at the beginning of this year.

(Updates with Bloomberg Commodity Index in final paragraph.)
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