By Michael Haigh, Greg E. Sharenow
Commodities stand to benefit from underinvestment and the clean energy transition
PIMCO has a positive outlook for commodities based on supply constraints, the transition to a net-zero economy, and their historical correlation with inflation. In this Q&A, Michael Haigh, executive vice president and commodities and real assets economist, and Greg Sharenow, a managing director who leads PIMCO’s commodity portfolio management group, explain their views.
Q: What is your near- and long-term outlook for commodities?
A: Headline inflation in most parts of the globe has been moderating, but core inflation has remained stubbornly high. Critically, commodities have tended to benefit from their extremely tight link with both inflation and inflation surprises.
History suggests that when spare capacity and investment is limited prior to a recession, supply constraints tend to emerge once demand growth resumes. These conditions exist today, so a long-term investor may view weakness stemming from a mild recession as an opportunity to use commodities to guard against inflation.
Over the longer term, the net-zero transition and deglobalisation could add to upside inflationary risks. Transitioning to a net-zero economy will be commodity-intensive. We expect unavoidable bottlenecks as demand outstrips supply, setting commodities on an upward trend in coming years.
Q: What about the energy outlook?
A: In the near term, despite macroeconomic headwinds, petroleum has constructive underlying fundamentals. It is remarkable that in 2022 China experienced a demand recession for oil, yet global demand grew above trend due to growth in developed markets. We expect demand in 2023 will exceed trend growth as the Chinese economy continues to emerge from its zero-COVID policy that ended last December. As growth and travel normalize, we expect gasoline and jet fuel to be the primary beneficiaries, supporting demand despite global manufacturing- and trade-related headwinds.
On the supply side, one of the biggest structural changes stems from slowing growth in U.S. shale production, with reinvestment rates the lowest in 30 years. This ultimately strengthens OPEC’s ability to influence prices, defend against downside price risks, and capture market share. Recent actions to curtail supplies despite below-average inventories benefit investors by keeping the futures market in a state of positive carry.
Over the longer term, current levels of capital investment in energy are insufficient to meet the energy-transition challenge and global demand growth. According to the International Energy Agency and S&P, global annual investment in energy must increase from $499 billion in 2022 to $640 billion in 2030, even if demand growth slows and plateaus by the end of the decade.