The Commodity Rally We’ve Been Waiting For

Matthew Benjamin By Matthew Benjamin
Editorial Director, The Oxford Club


Editor’s Note: Today’s Energy & Resources Digest comes from Matthew Benjamin, Editorial Director of The Oxford Club.

Matthew has spent his career researching and analyzing policy and commodities trends for World Bank, the IMF and other global institutions.

Some of you might have seen this article a week ago in The Oxford Insight, the Members-only publication from The Oxford Club…

But I received permission to run this otherwise premium content to our broader Energy & Resources Digest audience.

I’m thrilled because Matthew’s analysis is so compelling…

As a commodities and resources investor, you’d be doing yourself a disservice to miss this bit of good news.

– Patrick Little, Managing Editor

Commodities are back.

The recent political purge in Saudi Arabia pushed Brent oil prices to two-year highs.

The Saudi government’s unexpected crackdown on supposedly corrupt officials has energy markets worried about political volatility in the kingdom. Keep in mind that Saudi produces one in every nine barrels of crude produced around the world.

That kind of geopolitical uncertainty is enough to drive prices higher, at least until Saudi politics cool down. In addition, OPEC, of which Saudi is the leading member, has been working with Russia all year to cut production and drive up prices. And it’s working…

Yet, while oil is the king of commodities, there’s something bigger going on in this asset class.

But let’s back up a few years for context.

Beginning at the turn of the century, commodities – energy, metals and agriculture products – began a long, unprecedented price boom. West Texas Intermediate crude rose from about $29 a barrel in late 2001 to $156 in mid-2008. From 2010 to mid-2014, prices remained near $100.

Copper rose from less than $0.70 a pound in 2001 to more than $4.40 in 2011. The price of corn rose some 240% during the same period. Those are just a few examples.

In mid-2014, however, commodities experienced a massive drop. A strengthening dollar, coupled with weaker global demand, especially from a slowing Chinese economy, killed the so-called “Commodity Super Cycle.” The price of oil fell by half, and most other commodities followed it.

It didn’t hurt just commodity investors. Entire nations, especially emerging markets like Nigeria and Angola, which are dependent on oil exports, were devastated. An economic renaissance in sub-Saharan Africa was shattered, with much of the continent driven into recession.

The agony that the commodity drop caused in markets and entire economies was palpable (though Americans filled their gas tanks for a lot cheaper!).

Things in the world of commodities, however, are beginning to turn. Prices of commodities, as seen in the chart below, have been rising since June…

But every market boom – and bust, for that matter – is unique. Saudi politics aside, this one seems to have a different leader. A look at the chart below shows the prominence of metals – nickel, copper and aluminum among them – in the current commodity price upturn…

Energy is holding its own, with strong recent gains for crude and natural gas. But agricultural commodities, for the most part, are still lagging.

There are different leaders in this commodity uptick because there are different drivers.

The Commodity Super Cycle was driven largely by China’s rapid economic expansion and its rapacious appetite for raw materials to feed its manufacturing machine. The country’s consumption of the world’s metals grew from 12% in 2000 to half in early 2015.

No doubt, China will continue to be a major factor. After all, it is – by some measures at least – now the world’s largest economy.

But the current commodity boom – if that’s what we’re now witnessing the start of – seems to be driven at least in part by other factors.

Technology is a major one. As seen above, metals are going gangbuster. The rapid adoption of electric vehicles is driving up the prices of cobalt, lithium, copper, aluminum and nickel. New battery technologies – in EVs but also in solar power facilities and elsewhere – are doing the same.

Our strategists here at Energy & Resources Digest and Oxford Resource Explorer have been ahead of this trend for months now and will continue to follow it.

The time to watch commodities – and invest in them – is now. Don’t waste a minute.

Good investing,