By Andrey Dashkov, analyst, Casey Research

Andrey Dashkov

The global supply crunch is at the core of decades-high inflation.

When there’s not enough supply… and demand is high, prices go up.

Due to this supply-demand imbalance, there’s also fear of a possible recession.

So the question is, “What is the reason behind these supply shocks?” And “when could they get resolved?”

And finally, “How can investors profit from the most powerful force in the economy right now?”

Prices Are Soaring Everywhere

At the height of the pandemic, supply chain problems were easy to understand.

Production facilities and ports went on lockdown. As a result, fewer components and products reached the market.

On the other hand, governments across the world stimulated demand.

From China, Japan, the European Union, the U.K., and the United States… governments supported businesses and people through liquidity injections, cheaper loans, tax breaks, and direct payments.

So there was more money to spend, but less products to purchase.

This launched the wave of inflation we see today.

In the U.S., inflation is at multi-decade highs. But it’s at record levels in other countries and regions as well.

In the European Union, annual inflation was 8.1% in April 2022.

In the U.K., inflation reached 9% in April. That’s the highest level since 1982.

Some European countries are seeing inflation rates twice as high as the region’s average. In Estonia, for example, prices soared by 19.9% over the past 12 months.

What does this mean?

Massive inflation is a global phenomenon, so, much like the COVID pandemic, it must be the result of the same cause.

Is It All Due to Supply Shocks?

An energy supply shock is responsible for a lot of the inflation we’re seeing.

As the global economy rebounded after the pandemic, demand for oil started growing. This sent energy prices higher.

But then… the world realized it had underinvested in oil and gas production, which made producing extra oil and gas to meet rising demand hard (if not impossible).

So there’s a problem on the supply side. Energy production can’t be scaled fast enough to meet growing demand.

In response, oil and gas prices have shot up.

The war in Ukraine only made things worse. Russia is a major oil exporter, and if its production gets banned from the global market, oil prices will continue going up. 

And energy will stay expensive as the largest buyers of Russia’s natural gas and oil don’t have enough supply of clean energy yet.

The EU, for example, can’t get all its electricity from other sources… so it needs to continue buying expensive oil and gas.

Since producing almost anything requires energy, this is raising the prices of other products. Including food and commodities like metals.

That’s another supply shock.

All in all, the war in Ukraine exacerbated the three supply shocks the world is facing: energy, commodities, and food.

For instance, both Russia and the Ukraine are major suppliers of fertilizers. Ukraine is also one of the world’s biggest producers of wheat.

With its ports being blocked by the Russian army, those supplies aren’t reaching their global customers… threatening price spikes and hunger for millions of people.

But… is there a way out of this situation?

Our Supply Shock Strategy

Investors looking to protect themselves against these supply shocks should pay attention to what caused them. That’ll suggest which shocks could end soon and which will likely persist.

First, Russia’s invasion of Ukraine is slowing down. The country’s strategy seems to be biting land off Ukraine’s territory bit by bit.

But we could be looking at another year or more of slow offensives, counteroffensives, urban warfare, and a continued under-supply of grains and fertilizers.

In response to the fertilizer crisis, BHP, a global commodities conglomerate, decided to invest $5.7 billion into a Canadian potash project. It will likely start producing in 2026.

This tells us, unsurprisingly, that it takes years to increase the supply of a much-needed commodity.

So the supply shock in fertilizers could persist for years.

On the energy side, the situation is different, but the supply shock is here to stay until at least the end of this year.

Oil consumers are looking for alternative suppliers, and even if the war in Ukraine ends today, the damage done to the Russian reputation will prevent the developed world from rebuilding a relationship with it for a long time.

Undoing the effects of the invasion will take years, if not decades.

All of this points to an argument we have made in the past. Current events such as the war in Ukraine will likely support a broad and long-term global bull market in commodities.

It will favor the companies producing pretty much any commodity, from fertilizers, oil, agriculture products, and metals.

In fact, oil companies have been doing very well recently. Shell, for example, saw its share price rise by about 34% year-to-date.

These supply shocks could go away in months or years, but for now, we are looking at one of the best investment setups for commodities in history.

To get broad exposure to the commodities sector, consider this exchange-traded fund: United States Commodity Index Fund (USCI).

It tracks an index that follows a basket of commodity futures… including oil and gas, precious and industrial metals, grains, coffee, cattle, and others.

Good investing,


Andrey Dashkov
Analyst, Casey Research