Oil prices are trapped between the near-term disaster of rapidly spreading Covid-19 infections on the one hand, and the increasingly optimistic news regarding the availability of multiple highly-effective vaccines on the other. The future looks bright, if not right away.
While the eventual recovery of the global economy promises a return of commodity demand, a much bigger rebound could be on the horizon. According to a new report, a new commodity super-cycle could be just around the corner.
According to a new report, a new commodity super-cycle could be just around the corner.
“Structural bull market”
There is no shortage of expert analyses and forecasts calling for peak oil demand, and a “lower for longer,” or even a “lower forever,” oil price outlook. Indeed, even a growing number of oil majors see peak demand having already arrived, or arriving soon. With the heady days of rapid demand growth more or less off the table, prices have entered a long period of stagnation, a trend only magnified by the pandemic. It could take years for demand to recover, and by then, electric vehicles will take a growing share of the market.
That remains somewhat of a mainstream view. However, in a new report, Goldman Sachs says that not only will the vaccine allow for a return of demand growth, but that a series of factors point in the direction of a “much longer structural bull market for commodities.”
The investment bank highlighted three major factors. First, “under-investment in the old economy due to a decade of poor returns” will sow the seeds of supply shortages. The price bust from the pandemic exacerbated investment cuts, and the shift towards ESG investment trends is shifting capital away from this “old economy.” As a result, Goldman predicts the “end of non-OPEC growth” in 2021. In light of spending cuts on new supply, the bank argues that there will be “inadequate production capacity” to meet a “V-shaped vaccine driven demand recovery.”
A second factor is pandemic-related fiscal stimulus. Heading off economic calamity, governments have stepped up spending, aimed at redistribution, environmental objectives, and versatility in supply chains. Europe’s Green Deal, China’s new 5-year plan, and the potential for further stimulus in the U.S., among others, could yet “create the elusive cyclical upswing in demand,” Goldman analysts wrote.
A third factor relates to the U.S. dollar. At the start of the pandemic, the dollar strengthened as financial markets rushed to safety. But heavy fiscal stimulus and expansionary monetary policy could see the dollar’s position erode somewhat in 2021, “creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs,” Goldman said.
Commodity boom
It all adds up to a “structural bull market on part with the 2000s,” the bank’s analysts said. In the 2000s, there was a long commodity super-cycle, driven by a weak dollar, low interest rates and fast growth from emerging markets, chief among them the BRIC countries (Brazil, Russia, India and China). Goldman Sachs says the 2020s could see a rerun of that decade long expansion, which ended in spectacular fashion in 2008.
There are a few differences this time around that work even further in the direction of a bull market. For example, developing countries (China in particular) will participate in the consumer boom, rather than simply gobbling up commodities and exporting consumer products. Another difference is that inflation risk is much higher, according to Goldman analysts. In the face of the pandemic, there is an acute social and economic crisis in the U.S., which will lead to a period of both extraordinary monetary easing and also big fiscal stimulus. And unlike in the aftermath of the 2008-2009 crisis, policy responses to the pandemic are (or should be) aimed at social need, not at fixing the financial system. That means less austerity, and more spending, which should drive commodity demand.
Against this backdrop, commodities across the spectrum could see upward pressure. A “V-shaped recovery in demand will almost certainly face tight supply across all markets,” Goldman analysts wrote. “[N]early every commodity is in a deficit, including oil today, despite lockdowns.”
The investment bank sees Brent oil prices rebounded to $65 by the end of 2021, sharply higher than most forecasters think and nearly $20 higher than the futures market currently thinks prices will be at that time.
However, by no means are these predictions inevitable. For one, the economic malaise left over from the pandemic won’t go away overnight. Also, specific to the oil market, even if the market is technically in a supply/demand deficit, there is a historic inventory overhang that will take years to work off. Moreover, OPEC+ is still keeping 7.7 million barrels per day (Mb/d) off of the market, and it could take years for them to completely ease off of the supply curbs. There is no shortage of oil moving around; nor will there be for some years to come.
But beyond that, plenty of other analysts do not see oil demand ever returning to pre-pandemic levels. The shift towards renewables deflates the upward pressure on oil and gas, even as it could create more pressure on certain metals.
Time will well. But at the very least, with vaccines on the way, there is hope that the global economy soon escapes from its current slumber.
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