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Posthaste: Why oil will miss out on the next commodity supercycle

Financial Post logo Financial Post 2021-03-05 Pamela Heaven
a sign on the side of a building: Oil's days as a leader in commodity supercycles may be over, argues economist.  © Provided by Financial Post Oil's days as a leader in commodity supercycles may be over, argues economist.   a close up of a sign

Good Morning!

Oil is having a great day; in fact it’s had a great year so far.

Prices have soared in 2021, fuelled both by OPEC+ keeping a lid on supply and a vaccine-driven global recovery pushing up demand.

Crude prices jumped again today, up 2% to the highest in 14 months, after OPEC and its allies agreed not to increase supply in April.

But its days as a leader in commodity supercycles may be over.

Supercycles are when commodity prices go through long periods of boom and bust and in the past two, oil has particularly benefited, says Capital Economics.

But it argues that oil prices will not outperform other commodities in the next supercycle for two reasons.

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First, the very thing likely to trigger the next boom, the transition to green energy, will lead to a “structural decline” in oil demand. Governments in advanced economies are saying they will invest heavily in the shift to electric vehicles and many are encouraging cleaner fuels such as natural gas and hydrogen to replace diesel and fuel oil.

Oil consumption in the emerging world is also likely to peak in the next decade as their economies, including India, suffer long-term damage from the pandemic, argues Capital. Many of these countries as well are offering incentives for electric vehicles, particularly China and India.

Capital, like many other forecasters, see global oil demand peaking in 2030 and falling “continuously thereafter.”

Its second argument is that an abundance of oil supply will push prices down.

“The greater flexibility of U.S. shale production and the desire by many oil producers, particularly in OPEC+, to avoid their reserves being left untapped means that the world will soon be awash with oil,” said Capital economist Samuel Burman.

The new star of any future commodity supercycles will be metals, he says.

Electric vehicles, which contain three times the copper and 25% more aluminium than cars that run on gas, will drive up the demand and prices of these metals and more.

Unlike oil, metal mining involves a much longer lead time and production cannot be ramped up as quickly. Such supply constraints will support prices.

“All told, oil is unlikely to participate in the next commodity supercycle. Instead, we think that if the move to a greener economy leads to a supercycle in prices, it would be confined to metals given the much brighter demand prospects as well as supply constraints,” said Burman.


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Today’s Posthaste was written by  Pamela Heaven (@pamheaven), with files from The Canadian Press, Thomson Reuters and Bloomberg.

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