Commodity investments update

Many commodity stocks are still extremely cheap, but that does not mean they will increase in value this year. Still, they are valuable additions to a portfolio for several reasons. Commodity stocks are preferred to direct investments in commodities themselves. For example, many oil stocks are valued as if the price of oil were at $50 a barrel. In that respect, there is a cushion against further falling oil prices. Also, future inflation is likely to be caused largely by shortages of commodities.

Oil prices have fallen this year for several reasons. Some time back came news that China has settled for peace between Iran and Saudi Arabia, meaning that much of the Middle East premium has disappeared from the price of oil. Furthermore, Russia seems to have weathered the winter much better than thought. Russia is still producing a relatively large amount of oil and gas that is sold mainly to countries such as India and China, which, incidentally, is also available again in Europe via detours (and at higher prices). Furthermore, the Chinese reopening of the economy did not go so well. Chinese did not go on massive vacations like Europeans and Americans. That quickly saved several million barrels a day. Finally, there is some disagreement within OPEC+. The countries are by no means on the same page, even though history shows that with OPEC's market share growing, it is relatively easy to keep prices high. Several Arab countries have much higher spending patterns than before and therefore need higher oil prices. In the second half of this year, supply and demand come more into balance, again depending on the Chinese reopening. But unlike at the beginning of this year, expectations for this are low. What is true is that, for various reasons, there has been and is insufficient investment in fossil fuel extraction. In the somewhat longer term, this inevitably means shortages that can only be met by higher oil prices. Furthermore, the U.S. strategic oil reserve has yet to be replenished, although it appears that the Americans are playing a smaller role in the Middle East.

Metal prices have not risen this year because both Chinese and American construction are taking it easy. That, by definition, is a temporary effect. In the long run, those metals are mainly required for the energy transition, but for now, construction's market share is many times larger. And when construction then stops for a while, metals are not required either, and accumulated stocks depress the price. But as in the case of oil, there is completely insufficient investment in mining to even come close to the targets needed for the energy transition. The market form within mining is increasingly an oligopoly and mining companies are in no hurry to invest. These are now going for maximum returns. This means that investments are still completely insufficient to meet future demand.

In the agricultural sector, there is a clear correlation with energy prices, because food consists largely of energy. Of particular note is that after three years in a row of a La Nina, there is now an El Nino (the phenomenon that warms sea water temperatures in the Pacific near the equator). This is likely to cause warmer and drier weather in key feeding areas. Moreover, this El Nino may cause the effects of the climate crisis on weather to accelerate. It is possible, for example, that this year will break through the 1.5-degree rise in Paris for the first time. Now the temperature rise due to the climate crisis is not linear, but rather exponential. Melting permafrost and warming oceans may accelerate it.

Since the future looks bright for oil, metals and agricultural commodities alike, the current valuation of these stocks does not accurately reflect that future. There are several explanations why commodity prices have not risen (yet) this year, but shortages are being worked hard in oil and gas, in mining and, unfortunately, in agriculture.