Exploding nickel volatility has been 'in the making for months,' strategist says

Bank of America Global Research senior metals strategist Michael Widmer joins Yahoo Finance Live to discuss nickel volatility and the future for the oil market as the Russia-Ukraine war continues.

Video transcript

BRIAN SOZZI: Top concern on the minds of most investors is the outlook for commodities. Prices for crude oil and grains have come off their recent highs, but are still hovering at inflated levels. Our next guest outlines three scenarios for commodities-- good, bad, and ugly. Michael Widmer is a senior metal strategist at Bank of America Global Research and joins us now. Michael, good morning to you. Maybe it's just the mood I'm in, but let's start on the ugly. How ugly can it get for commodities prices for oil, for grains, for metals, and what triggers some of those scenarios?

MICHAEL WIDMER: Look, the ugly scenario actually from a commodities perspective is a scenario that is actually quite bullish in that regard. So I think the scenarios that we outlined there were really linked to the conflict that we do have between Russia and Ukraine and the war. And I think, clearly, Russia is a-- Ukraine to some extent as well-- I think resource intensive economy.

So if you're starting to lose some of those commodity flows, and you don't necessarily reroute them to other countries, I think it could become quite difficult, I think, for commodity markets to stay balanced or even always oversupplied. So you showed the usual scenario there, for instance, for the oil market. I think if you did lose some of the energy supply from Eastern Europe, yes, it would become very tricky.

JARED BLIKRE: Michael, I want to focus on what happened recently with the nickel market because just a little bit of background here for the viewers, nickel market was shut down last Monday. Bunch of trades canceled or busted, and that's because the price of nickel had shot up to 100,000 for the first time, multiples of what it was in prior sessions. And the nickel market is reopening tomorrow at the London Metal Exchange. I'm just wondering what you think about this in terms of market integrity and the signals it's sending to the market.

Only the last Friday, we got notice of a report that JPMorgan could have been on the hook for more than a billion dollars' worth of losses due to margin calls. But now it looks like the players are just kind of negotiating by themselves while the market remains closed. And if there were some kind of analog, it would be like the GameStop episode or Archegos. Nobody shut down GameStop trading or AMC trading or anything else for a week or more. I'm just wondering what you view-- what your view of the situation is.

MICHAEL WIDMER: Look, I think it's been actually a situation that has been in the making for months. I think we started to see initial tightness on that metals exchange already in October last year. And then I think as we moved into this year, things got already quite volatile, and it turned out that there was a large short position holder, which found it hard, in a way, to cover those short positions.

Now I mean, you can do that in two ways. Because it's a physically backed contract, you can deliver physically into expiry. That's hard at the moment because you generally don't have an awful lot of nickel out there. Or you can buy the offsetting long, and I think that was also quite tricky. And I think the LME decided to let it run. I think they could have gotten away with it if it hadn't been for the war in Ukraine, effectively, because Russia is a big nickel producer, in a way. Price has rallied, and that really put the squeeze on those short positions.

And you showed the chart there the market just became very disorderly. You had, in essence, very simplistically put, a lot of demand for that offsetting long, but no one wanted to give you that long. And so the only thing that you could really do to preserve some kind of market integrity is shut down the exchange, and then during the last kind of week or so, try to sort out and reopen then in a more settled environment.

JARED BLIKRE: And I'm just wondering, bigger picture here-- the old saying is there's never just one cockroach. When we turn on the lights here and we have a crisis, are there more pockets of instability where we could see some of these tail risks emerge from the commodities complex, which historically has been very safe?

I come from the derivatives industry, and we went through the global financial crisis without a hiccup, at least in the futures industry. But Zoltan Pozsar over at Credit Suisse was writing in prior weeks that he sees parallels between the current situation in commodities and subprime in 2007, 2008, all underappreciated risks. I'm just wondering what your view of the situation is.

MICHAEL WIDMER: Look, I give you one very concrete example. And I think that we already highlighted that in the wake of the last COP summit. The heart of the global community, rightly so, leans on decarbonization and net zero the stronger demand for some of the mined commodities and the metals becomes. But reality is that we had underinvested in mine production for the best part of the past 1 and 1/2 decades. Inventories through the supply chain of the mined commodities are actually quite low. And that's one of the reasons why we actually had this extreme volatility on LME.

So if you now move kind of into 2023, 2024, we are looking rightly so to decarbonize the economy, get to net zero quicker. The demand pull on the mine commodity will just get even stronger. And that is where we could potentially see an awful lot of volatility come through. So in a way, put it differently, I think we are kind of assuming that the metals or the mine commodities are there to get to net zero by 2050, but we do see the constraints actually on the ground that might mean that unless we get more investment, we need to double Capex in the mining industry. That unless we get that investment, we might face issues in putting enough renewable economies onto the road.

BRIAN SOZZI: Michael, we got a recent, I would say, dire warning by Tesla CEO Elon Musk on inflation. Of course, I know you don't cover Tesla, but they are out today raising prices pretty significantly for their cars, I imagine in large part because not just steel, prices for lithium that goes in the batteries have gone through the roof. Do you see any relief on lithium prices here?

MICHAEL WIDMER: I think this is exactly the case in point here. I think we have seen inflation being bottled up through the supply chain for the best part of the past two years, actually. And I think what we see right now doesn't suggest that there is a lot of relief, actually, coming through here, at least from the metal side from a structural perspective. On the lithium side, it's very simple. You need every single project to come online on time and with the volumes promised to make sure that you don't have any shortages.

And this is a really big ask. The lithium markets, say, recently was around 300,000 tons. If you want to get to net zero by 2050, the lithium market will need to be three million tons by 2030. So this is just exponential growth. And unfortunately, things do go wrong along the road every once in a while. And you've seen it even in lithium prices in the past few months. You've had a very, very sharp rally.

BRIAN SOZZI: Michael Widmer, senior metal strategist at Bank of America Global Research, appreciate the help this morning.