Could we see even higher commoditiy prices in the future?
The following is a case presented to support why we should continue to see an upward investment trend in commodities and how this positive long-term trend is due largely to the supply and demand imbalances that persist in industries that produce commodities.
In addition, the market turmoil of the past two years caused new financings of commodity exploration and development projects to become next to non-existent, so these imbalances have been exacerbated.
Ultimately, the message is the supply / demand imbalance has created a recipe for longer-term commodity price strength. It appears all the ingredients are in place for this longer-term secular theme to play out.
Using oil as an example, here are some points to consider:
- If China and India per capita consumption grows to levels similar to Mexico’s current consumption, global demand would increase by over 36 million barrels per day. This would require the equivalent of three more Saudi Arabia’s to meet this demand.
- Future oil demand will come from developing countries. For example looking at global energy demand from 2005 through 2030, it is projected that OECD (Organisation for Economic Co-operation and Development) countries will show a 19% increase while Non-OECD countries will show an 85% increase.
- Supply constraints support ‘higher for longer’ prices in oil.
- Oil reserve decline rates are getting higher, and the costs of getting oil out of the ground are increasing (the oil sands being a good example of this).
- Even if large-scale investment resumed immediately there is a time lag before commodities can get to market, so this makes it very likely that we will see most commodity prices go higher in time.
An argument against commodities in the long-run requires a belief that the U.S. economy will implode, China and India will not grow, and the wealth effect caused by the growing middle classes in developing economies around the world will not occur.
In my humble opinion, it would be a large stretch to see all of the aforementioned scenarios not play out.