Given all the contradictory signals coming from the global economy in the shape of yield curves, unemployment data, and business and consumer confidence surveys, could the direction of trade derivative bets linked to oil and fuel prices provide the best guide to the direction of the global economy? If so, and given that those wagers are as bearish as they’ve been in more than a decade, it could be time to fasten those seatbelts.
Why commodities bets are pointing to recession

It was the best of times, it was the worst of times
The ‘will there, won’t there be a recession?’ tug of war in financial markets has been going on for many months. Economic pessimists can cite the yield curve in the US, which has been inverted for around a year. That situation has foreshadowed every recession since 1969.1
Across the Atlantic, the gap between 2-year and 10-year German bond yields, which serves as the eurozone’s de facto borrowing benchmark, reached a 31-year low in early July of minus 87 basis points, a clear sign that markets think the eurozone’s economic activity is set to sink ever further – the bloc is already in a technical recession.2
And yet the US unemployment rate stands at 3.4%, the lowest in a half-century3, and US stocks entered bull-market territory in June.4 US officials are even busy revising up earlier growth estimates. In late June, the Commerce Department sharply upgraded its assessment of first-quarter growth to 2%, from its previous figure of 1.3%.5 Meanwhile, US consumer sentiment continued to improve in June.6
So, what’s going on? The time lag between changes in monetary policy and their impact being felt could be one answer – as we pointed out in this article – while the direction of bets in commodity markets could prove another.
The mercury plunges
Oil, for example, is often described as the lifeblood of the global economy, and the price of oil impacts just about every other commodity. So, if anything should act as a barometer of the global economy, it should be oil – and the indications here are pretty gloomy.
Bloomberg reported in May, for example, that:
‘The trading positions of non-commercial players such as hedge funds are near the most bearish levels since at least 2011 across a combination of all major oil contracts. And in bets that are perhaps most indicative of recession expectations, speculators’ combined views on diesel and gasoil — fuels that power the economy — are near the most bearish levels since early in the Covid-19 pandemic.’
The negative sentiment towards oil reflects concern over the outlook for the two main engines of global economic growth. Oil traders fear that the Federal Reserve’s rate hikes will eventually provoke a contraction, while demand from China is proving weaker than expected as the country’s economy limps, rather than sprints, out of its pandemic-era restrictions.
Weaker-than-expected global demand
There are also concerns that attempts by OPEC+ to restrict the supply of oil are doomed to failure. OPEC+ groups the Organization of the Petroleum Exporting Countries (OPEC) with allies led by Russia. It has been cutting supply to boost prices since November last year, but so far has failed to move them much from a range of $70–$80 a barrel. That reflects weaker-than-expected Chinese demand, rising US supply and Russia’s dumping of oil to China and India at prices which are below its cost of production and shipping, according to Jeffrey Sonnenfeld at Yale School of Management.7 In early July, for example, oil prices declined on global growth concerns, even after fresh output cuts by key producers Saudi Arabia and Russia aimed at propping up prices.8
The downward trend in the oil price is mirrored in other global commodity prices. After shooting up after pandemic lockdowns ended, commodity prices in general have been falling since quarter three (Q3) 2022. Take the prices of other commodities that are linked to global growth. Iron-ore futures, for example, are well down on the figure they reached in March, when the outlook for the global economy appeared to be improving. It’s a similar story with copper, another metal with a myriad of industrial uses.
Figure 1: do falling commodity prices since the end of quarter three (Q3) 2022 point towards recession?

Pricing in recession
Commodity prices are generally considered a good leading indicator of the global economy, so the downward trend underway since the end of 2022, and the bearish bets being placed by hedge funds and others, suggest the global economy could well enter recession this year or next.
1 https://www.npr.org/2023/04/14/1170170563/an-indicator-that-often-points-to-recession-could-be-giving-a-false-signal-this-
2 https://www.ft.com/content/0b39104a-3747-4e91-8a77-83ccc1dd306a
3 https://www.bls.gov/opub/ted/2023/unemployment-rate-3-4-percent-in-april-2023.htm#:~:text=The%20unemployment%20rate%20was%20little,percent%2C%20along%20with%20January%202023.
4 https://www.ft.com/content/e0a3a81e-2420-458d-b41e-637b5210b44f
5 https://apnews.com/article/economy-growth-gdp-inflation-consumers-federal-reserve-14560ad6bbb6b5322f9bccffc918ac04
6 https://www.bloomberg.com/news/articles/2023-06-30/us-consumer-sentiment-improves-further-michigan-report-shows
7 https://www.youtube.com/watch?v=KSEzKPUzRdc
8 https://www.al-monitor.com/originals/2023/07/oil-prices-fall-despite-output-cuts-equities-wobble#ixzz86UhtJPUN
Publication date:
The information in this presentation does not contain (and should not be construed as containing) personal financial or investment advice or other recommendation, or an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently, any person acting on it does so entirely at his or her own risk. The information does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. IG Australia Pty Ltd ABN 93 096 585 410, AFSL 515106.
Contact us
Let us create a solution tailored for your needs. Get in touch with our Australian-based team by phone or email to discuss your objectives, or request a brochure.