Why the Commodity Bull Market Is Just Beginning

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLCBullish

Suncor is a top pick: long-life oil sands assets that benefit most from higher crude.

Suncor is one of his firm's two big oil sands holdings. He calls it a very well-run company with assets that last about a hundred years and almost never decline. Its capital spending is already done, so higher crude flows straight to cash flow. He says oil sands pure-play producers will be the biggest beneficiaries of a rising crude price, and he prefers them to integrated majors.

“Suncor and C and Q [Canadian Natural Resources] are two big holdings of ours. I think those are very, very well run companies that have a hundred year assets, essentially.”at 46:42

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLCBullish

Canadian Natural is a top pick: long-life oil sands assets that gain most from higher crude.

The transcript says 'C and Q', which is taken here to be Canadian Natural Resources (CNQ), one of his firm's two big oil sands holdings. He calls it a very well-run company with assets that last about a hundred years and almost never decline. The capital has already been spent, so it will be among the biggest beneficiaries if crude rises. This is a pure-play upstream name he prefers to integrated majors.

“Suncor and C and Q [Canadian Natural Resources] are two big holdings of ours. I think those are very, very well run companies that have a hundred year assets, essentially.”at 46:42

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLCBullish

Cameco is a core uranium holding as the big Canadian bellwether producer.

His firm owns Cameco, the big bellwether uranium producer in Canada. It is the main public-equity route to his view that uranium will keep rising in a tight market. Supply takes years to bring on, so existing producers are well placed. He holds it as part of a long-term uranium position rather than trading it.

“We own Cameco, which is the big bellwether up in Canada.”at 49:21

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLCUncertain

Kazatomprom is held but under pause: tax changes, geopolitics and deteriorating geology weigh on it.

His firm owns Kazatomprom, the Kazakh uranium producer, though it is much smaller than Cameco. It has long been comfortable with its governance and country risk. Three things now give him pause: tax changes moving in the wrong direction, Kazakh uranium becoming a hot-button issue between Russia and the US, and geology at its assets deteriorating sharply. Its assets are no longer as exceptional as five years ago.

“We own [Kazatomprom], although much smaller. That's the Kazakh uranium producer... but there's a few things that are giving us a little pause there right now.”at 49:32

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLCBullish

TerraPower, still private, will likely win and dominate the next nuclear reactor cycle.

He spent a long research project in the labs of SMR and advanced reactor companies and found some of their work extreme. He believes TerraPower's technology is the next generation of reactor and that it will win the cycle. It is not publicly traded, so he cannot own it. He has a personal belief in its prospects but has not backed it with figures.

“My personal belief is that the company that will win and dominate that cycle is actually not publicly traded right now. It's Bill Gates' TerraPower.”at 51:20

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Upstream oil spending of about $500bn a year is far too low and well below previous peaks.

Capex trends are one way to measure where a commodity sits in its cycle. Oil upstream spending is about $500bn a year. Adam says that is not nearly enough, and in real terms it is far below the peaks of earlier cycles and the level reached in the last cycle. Low investment today means supply is not being rebuilt, which supports the case that the cycle has further to run.

“we're spending about $500,000,000,000 a year upstream. First of all, I don't think that's anywhere near enough. But in real dollars, I mean, you're far off peaks.”at 14:24

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Gold-to-oil ratio is at a record high, so oil should outperform gold.

The gold-to-oil ratio is a simple way to choose between the two. In January one ounce of gold could buy about 90 barrels of oil, an all-time high. Historically, when gold bought about 30 barrels, investors should move from gold into oil. The only comparable reading was COVID, when oil went negative and the ratio went to infinity. Gold looks cheap against financial measures but expensive against real goods and commodities. On this measure oil is at record cheapness relative to gold, which Adam says is one of the key decisions his fund must weigh. For a portfolio that can rotate between the two, he concludes oil will probably outperform gold.

“Well, if you're investing in a portfolio that can do to simplify things a great deal, gold or oil, it means that oil will probably outperform. Indeed, the gold to oil ratio reached an all time high back in January where a single ounce of gold could buy 90 barrels of oil.”at 20:28

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

US shale has slowed and is essentially no longer growing, following a Hubbert-style peak pattern.

Adam views oil supply through a Hubbert-style peak lens. Each field or basin ramps up, plateaus and then declines, and the size of the field determines when and how high it peaks. Historically the main source of supply growth has stalled three times. The US peaked in 1971, as King Hubbard predicted in 1955, and that triggered the first oil crisis. The North Sea and Cantarell then rolled over in the same pattern, which Lee predicted in the early 2000s. Their slowdown accounted for about 70% of growth in the prior decade and tipped the market into deficit, pushing prices to $145. The shale boom that followed brought on the equivalent of two and a half Saudi Arabias. Shale is now slowing and essentially no longer growing. The firm began studying in 2019 and 2020 whether shale will also run out.

“the important thing that's happening in the energy markets today is that the shales have slowed down, and they're essentially no longer growing.”at 30:53

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

US shale oil production has peaked and is starting to decline.

His firm built a neural network on shale oil productivity in 2019-2020 and predicted shale growth would keep slowing each year. That has played out: growth has slowed from 2020 to 2026 and is now flirting with negative year-on-year. He says a real energy crisis with a price spike of six to twelve months could temporarily restart growth. In the 1970s oil rose fifteenfold, yet US output still fell about 30% despite drilling four times as many wells. He thinks shale faces the same structural decline.

“Shale has peaked.”at 36:39

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Energy transition is not eroding long-term oil demand; EV uptake is hitting a wall outside China.

Full-cycle energy efficiency of alternatives is poor, so countries struggle beyond virtue signalling and subsidies. Outside China, EV penetration is starting to hit a wall. China is different because it wants to cut its dependence on imported crude. Global crude demand has grown steadily at about 1 million barrels a day year on year, which he calls the long-term run rate. He sees no structural demand decline from the energy transition.

“So outside of that, we're starting to see a little bit of a hitting of a wall, with straight EV penetration outside of China.”at 37:53

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

The Hormuz oil supply shock is a worsening crisis hidden from headline numbers.

The Strait of Hormuz closed on March 1. His firm estimated that 10 million barrels a day of production would be shut in for about 100 days, roughly a billion barrels, with no spare inventory to cover it. The closure has now lasted about 215 days, and the market has not hit tank bottoms as expected. He argues the bears' view that the market had a big surplus is wrong. The crisis is real but is showing up in logistics and refining rather than in visible crude inventories. He cautioned that inventories could run out during the summer, as JPMorgan also said.

“I think we are in the midst of a crisis as we speak. I think that crisis is getting worse.”at 39:49

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Reported 6M bpd oil demand drop is a refinery-capacity artefact, not real demand destruction.

Oil demand is not measured directly. Agencies model it, mainly from refinery crude intake. Refining capacity fell by about 6 million barrels a day: about 2 million in Russia from Ukrainian strikes, 2 million in the Persian Gulf, and 2 million in China after a policy to cap domestic fuel prices. Consumption of refined products has not fallen; refinery runs have. He argues a 6 million bpd demand collapse would be as severe as COVID or the GFC, and the economy does not look that restricted. The apparent demand loss is a supply-side effect.

“that's why people think we've lost 6,000,000 barrels of demand. But I don't think the consumption of those refined products has gone down. It's just the refinery runs have gone down.”at 43:01

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Crude must rise about $80 to close the gap with $200 diesel within six months.

Diesel is around $200 and may stay there or ease somewhat. Crude is around $100. Normally there should be about a $20 gap between diesel and crude, so today's gap is about $100. He argues that about $80 of crude price rise is needed to close it. That would happen if refiners restarted and restored normal refining margins, or the crude price would move up to match diesel. He says the crude price is being masked by the logistics bottleneck in the middle of the chain.

“$200 diesel, maybe that stays there, comes down a little bit. But the big thing that's gonna move is a $100 crude is going to come up to match that.”at 46:06

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Commodities are in early stages of a strong bull run, unlike 2012, based on capital-cycle rules.

Commodities are cyclical, and the cycle follows historical rules tied to capital investment. The market price signal takes roughly 10 to 15 years to bring new supply online, and that lag is lengthening because easy-to-find resources are depleted and environmental baseline studies can take five years. Prices therefore overshoot in the interim, and capital spending at the mid-cycle point becomes excess investment that eventually produces a supply glut and a bust. Adam argues that unlike 2012, when stocks looked cheap just before the capital cycle turned, the cycle started around 2020 and capex has been slow to rise, so the industry is very early. He sees the 10-to-15-year cycle as investable, and he treats 'super cycle' as misleading because it implies no end, when this is simply a very large cycle with a finite duration.

“And when you follow those rules and apply them today, they tell you that today, unlike 2012, we very much are in the early stages of a strong bull run.”at 2:08

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Commodity-to-stock price ratio is low and falling, signalling an early stage and capital leaving resources.

The ratio of commodity prices to stock prices is a proxy for the capital cycle. A low and falling ratio means stocks are outperforming commodities, and capital is being pulled out of extractive sectors into broad indices that are dominated by tech. When commodities far outpace stocks, the reverse holds: it is a good time to own real assets. The ratio moves in a predictable band, with highs and lows at similar levels. Adam's team borrowed the chart from Jeffrey Gundlach, who had borrowed it from Tony Beck at BCA Research, but they extended it back to 1900 instead of 1970. The extended series shows repeated cycles of large amplitude lasting about 10 to 15 years. The only cheaper reading was the 2020 bottom, and apart from that the ratio is not at the lowest low of any earlier cycle, which he takes to mean the cycle is very early.

“The ratio is low and falling. What that's telling you, not only does it mean that stocks are doing better than commodities, but it likely means that capital is being sucked out of the extractive sectors”at 15:02

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Diversified miners dilute commodity upside; targeted pure-play producers give better exposure.

His firm has always found more value in targeted pure-play companies than in diversified majors like BHP, Rio Tinto and Glencore. The majors manage commodity volatility by running around 20 product lines. That approach smooths returns but limits upside capture when a specific commodity call, such as oil, copper or uranium, works. For investors who want the commodity cycle, he suggests pure plays or a resources fund.

“we've always found there to be more value in going into a little bit more targeted pure play companies. Right? BHP, Rio, Glencore, the way that they manage commodity volatility is to have 20 different product lines.”at 51:52

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Commodities are near the bottom of a multi-decade bear market, so a bull phase is still early.

Commodities move in very large cycles, so backward-looking allocation studies give very different answers depending on whether the window is in a bull or bear phase. He thinks commodities are still at the bottom of a bear market. That is why he sees a bull market beginning rather than mature. Oil, uranium and copper are all in early moves, and his firm's portfolio is entirely commodities.

“At the bottom of a bear market, like what I think we're still at right now, could you argue for a little higher? You could.”at 53:50

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Gold will fall further before making new highs this cycle; a better entry point likely comes first.

Adam thinks the gold bull market is not over and that gold will make new highs this cycle, which he dates from 2020. Holders with a long horizon should be happy by 2035, but gold will likely fall before it rises. Relative to other assets gold looks expensive: the gold-to-oil ratio hit about 90 barrels per ounce in January, against a historical switch point of about 30, and only the COVID oil price collapse was more extreme. Speculative Western buying of gold ETFs, such as GLD, last year is a concern because trend followers could liquidate sharply if the price falls. Lee's silver catch-up ratio also flagged the January silver rally as a signal to reduce exposure. The firm cut its gold-equity exposure from close to 30% to 5%. Normal retracements after that signal run 20% to 45% and average about two years. Gold is about nine months and 20% into the move, so a bottom here would be the shallowest retracement since gold began floating in 1971, which he doubts. The market has also not priced in further Fed hikes, since gold fell when the first one came. He sees gold as a ballast for long-term holders, but for a two-year tactical view he thinks the probability favours a better entry point. His eventual target is $10,000 an ounce.

“I do think that there'll be a better entry point, before then. I think gold will move lower before it moves higher.”at 19:53

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Central banks' diversification away from the dollar continues despite a recent pause in buying.

Central bank gold buying was a major driver of the early part of the gold bull market, and there was a recent pause. Adam says the volatility is real but the trend is not over. The motives for central banks to diversify at the margin away from the dollar remain in place. Geopolitics has not calmed since January, which supports those motives. He therefore sees the pause as temporary rather than the end of the buying trend.

“there's maybe a bit more volatility, but I don't think actually that that trend is over. I think all the motivations for central banks to wanna diversify on the margin away from the dollar remain.”at 23:19

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Uranium will keep rising, with sharp retail and hedge-fund swings around a clear uptrend.

His firm bought uranium near the bottom of the cycle, at about $18 a pound. Supply takes a long time to bring on and demand grows slowly, so the market has good visibility and should stay tight. Prices will move up in a steady trend but swing around it on retail and hedge-fund euphoria and pessimism. He sees uranium as the clearest commodity trend. He prefers to hold through the volatility rather than trade the swings.

“But uranium, I think, is gonna continue to move much higher.”at 47:52

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Listed SMR stocks are too expensive for a revenue promise in the 2030s; stay clear for now.

Some SMR developers have strong technology; his research in their labs found work that could produce the next generation of reactors. Others are more hype and hope. The publicly listed ones are very expensive relative to revenue that is not expected until the 2030s. So he would stay clear of them for now. His firm does not invest in SMRs, not because of a mandate, but because they do not look attractive yet.

“Others are a little bit more of hype and hope. And the problem with the publicly listed ones right now is that they're awfully expensive on sort of the promise of revenue sometime in the twenty thirties. So I would stay clear of them for the time being.”at 51:02

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Lithium's capex boom while other commodities busted explains its poor recent performance.

During the commodity bear market, ESG themes made lithium look like a green growth area, and investors devoted their attention to it. Lithium therefore had a capex boom while the rest of the commodity complex had a capex bust. Because each commodity runs its own capital cycle, that lithium supply wave is unrelated to copper or uranium and has pushed lithium's prices down. Adam says this is why lithium has performed so poorly, even though the broader commodity cycle should be starting to improve.

“lithium had a CapEx boom while everything else had a CapEx bust. And that's, I think, why lithium is performing so poorly now.”at 18:36

Adam Rozencwajg · Goehring & Rozencwajg Associates, LLC

Fed is at the beginning of a rate-hike cycle, and further hikes are not yet priced in.

In January Adam's firm predicted hikes later in the year, when most expected cuts under the new Fed chair Warsh. Their logic was that when everyone expects cuts, the market tends to punish the greatest number of people, so the unpriced outcome is a hike. Because of the Strait of Hormuz disruption and persistent inflation, the Fed has delivered hikes, so the rate-hike cycle has started. Gold fell sharply when the first hike arrived, which suggests the market has not priced in the further tightening he expects. He sees this as the early stage of the cycle.

“Now, of course, because of the Strait Of Hormuz and persistent inflation, we've had those. So we're in a rate hike cycle right now. We're at the beginning of that.”at 25:18