Why oil could miss out on the next commodity supercycle

Oil will be left on the sidelines of the next commodities supercycle as rising supply dampens prices, and the global transition to green energy intensifies.

That’s the view from Capital Economics on a day when OPEC+ surprised traders by committing to leave most of its production cuts in place through April. The announcement sent U.S. crude futures (CL=F) to their highest level in more than a year on Thursday. However, the London-based research firm does not expect prices for the pandemic-battered commodity to surge for long.

“Slower demand growth and an abundance of supply will limit gains in oil prices over the long term, which we think will ultimately prevent oil from featuring in the next commodity supercycle,” assistant commodities economist Samuel Burman wrote in a research note on Thursday.

Capital Economics believes global demand will peak around 2030, and fall continuously thereafter. The firm sees the transition to electric vehicles and sustainable energy being backed by a growing number of first-world governments leading to a “structural decline in oil consumption.” At the same time, it expects long-term economic damage from COVID-19 to limit demand from emerging markets, many of which are also embracing EVs.

Commodities have seen four supercycles over the past 100 years. The last one peaked in 2008, after 12 years of expansion.

Last month, two of the biggest banks on Wall Street - JPMorgan Chase and Goldman Sachs - joined others predicting a new commodities supercycle as economies reopen and the risks of the pandemic subside.

The expectation is for a long-term boom spanning oil, metals, and agricultural material prices. JPMorgan’s head of oil and gas, Christyan Malek, recently offered one of the most bullish forecasts for oil, suggesting international crude prices could rebound to US$100 per barrel.

Burman is skeptical that another commodity supercycle is ramping up, and is less convinced that oil would be a strong performer if one were. He said metals for EVs, such as copper and nickel, are better positioned because demand is strong and increasing supply from mines is challenging.

“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,” Burman wrote. “By contrast, metals mine supply involves much longer lead times, suffers from dwindling ore quality, and production can’t be ramped up as quickly.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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