Global Weekly Commentary: An era of higher commodities prices
What's behind the prices
Commodities prices have spiked as demand from the restart clashed with tightening supply. We see the war and net-zero transition keeping prices high.
Market backdrop
U.S. and euro area inflation data last week showed still persistent inflation. Stocks and bond yields fell as markets priced more risk of rates hitting growth.
Week ahead
Labor participation and wage growth are key to watch in this week’s jobs data, we think, as the Fed weighs the magnitude of its next rate rise later this month.
We see an era of structurally higher commodities prices ahead. Why? First, look back. Prices ran up because the economic restart drove demand amid abnormally low supply. The West has tried to wean itself off Russian energy after years of declining investment. Now, look forward. We see structurally higher prices amid tight supply for energy and rising demand for metals that will be critical to power the path to reach net-zero carbon emissions by 2050.
Investment dearth
Global capex expenditure in oil and gas, 2010-2025
Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, Wood Mackenzie, June 2022. Note: The chart shows global capex expenditure in the oil and gas sector from 2010-2015 and from 2015-2020, as well as projected capex expenditure for the period 2020-2025.
Commodities prices and renewables have surged over the past two years, even with recent declines. Rate hikes choking off the restart could cause more dips. But we think prices are at structurally higher levels now. Why? The West is trying to wean itself off Russian supplies. The flow of Russian gas into Europe has fallen by two-thirds already in just a few months. This is a structural change, and we see it as part of accelerating geopolitical fragmentation. The supply crunch is rooted in years of declining investment from traditional energy companies (see the red bars in chart) and forecasters expect even less in years to come (the yellow bar). This hasn’t been balanced by equally strong investment in clean energy supply. Lower capital expenditures are a result of both investors pushing for more capital discipline and concerns about long-term demand for traditional energy.
Energy commodities prices are likely to be supported by growing energy demands amid tight supply in coming decades. Even with improving energy efficiency in developed markets, global energy demand could rise significantly, especially if energy consumption in emerging markets jumps markedly as living standards improve.
And even with rapid growth of clean energy infrastructure, it would be nearly impossible to meet energy demand in coming years without fossil fuels, as we say in a recent net-zero report. Some investment will likely still be needed in new fossil fuel production capacity to meet energy demand. Without capex, production generally falls as wells deplete. Current investment is below what is needed to meet demand in the short run, in our view, as capex has dropped by nearly half since 2014.
Transition to boost demand
The buildout of clean energy infrastructure will boost demand for other commodities, too. Transition essentials like wind turbine farms and electric vehicles require staggering amounts of iron ore, copper, lithium and other metals to match fossil-fuel-generated power sources’ outputs. Mineral demand for clean energy technology would have to rise by at least four times by 2040 to meet climate goals, according to the International Energy Agency.
The transition path remains uncertain. Last week’s Supreme Court decision means the Environmental Protection Agency now has more limited regulatory authority in requiring utilities to reduce reliance on higher carbon sources of energy, unless Congress approves legislation. This reinforces our view that the invasion of Ukraine has created a more divergent transition globally as Europe doubles down on net-zero efforts. The same impetus isn’t felt elsewhere.
What this means for investments
Time horizon is key. In the near term, we expect sharp rate rises from the Federal Reserve to choke off the restart of economic activity. That typically implies bad news for commodities or commodities producers – but not if we are in a new era of higher commodities prices. We see tactical opportunities in selected energy stocks after the recent selloff. They now appear priced for some retrenchment of energy prices, and we could see rising revenues and earnings amid the race to replace Russian supply.
On a longer-term, strategic horizon, we believe lower-carbon sectors like tech and healthcare will benefit more than traditional energy stocks. At the same time, we think some of the greatest opportunities may be in carbon-intensive companies with credible decarbonization plans or companies supporting the transition with the supply of critical minerals.
Market backdrop
Stocks slid after U.S. and euro area data last week showed persistent inflation and signs of slowing economic activity. U.S. two-year Treasury yields posted their largest weekly drop since 2020. Short-term rate markets are signaling doubts central banks, including the Fed, will hike rates as high as their projections. Central bankers’ talk on fighting inflation also gave little indication they face a policy trade-off: either crush growth or live with inflation. So we don’t see this as a time to buy the dip.
The key focus in next week’s U.S. jobs report will be signs the labor market is gradually healing – especially a recovery in labor participation. Labor shortages have added to U.S. inflation’s march up to 40-year highs. We think wage growth may help the labor market normalize by enticing people back to the workforce and incentivizing them to stop hopping jobs for higher pay.
Week ahead
July 5
China services PMI; U.S. factory orders
July 8
U.S. jobs report
July 9
China inflation data
Source
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of June 30, 2022. Notes: The two ends of the bars show the lowest and highest returns at any point this year-to-date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, Refinitiv Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
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