Investors are stepping up bets that a global push to reduce carbon emissions will hamper the production of raw materials, pushing up the prices of everything from natural gas to aluminum.
With producers such as Exxon Mobil Corp. and Chevron Corp. under pressure from investors to minimize environmental damage, many limit spending on new productions. The caution comes after years of declining investment in production that were dragged down by lackluster commodity prices and a focus on returning money to shareholders, analysts said.
Spending on oil and gas exploration and production is now expected to increase slightly in the coming years, but remain below 2019 levels and around 40-50% below a 2014 record, according to firm figures of Rystad Energy Consulting. Even with the prices of metals like copper also at their highest levels in years, annual spending by mining companies is expected to remain around 30% or more below a 2012 high in each of the next five years, according to compiled data. by investment bank Jefferies.
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Bets on supply disruptions and recovering demand are already raising commodity costs for consumers and businesses and fueling investor anxiety over rising inflation. While the near-term outlook for demand is bleak due to the spread of the Delta variant of the coronavirus and the turmoil affecting heavily indebted property developer China Evergrande Group, some analysts still expect limited supply to support markets. commodity prices.
Following recent price gains, a commodity index is now poised to experience its biggest annual percentage gain in three decades, according to FactSet. The surge in oil this year has caused consumers to pay some of the highest prices in years for gasoline, pushing the average U.S. price of a regular gallon to around $ 3.20, according to price tracker data GasBuddy.
Brent crude, the global gauge of oil prices, rose 1.4% to $ 77.25 a barrel on Thursday, hitting its highest level in nearly three years.
Natural gas, used as a fuel to generate electricity to cool homes in summer and heat them in winter, recently peaked in 7.5 years above $ 5 million in UK heat units. Prices could rise even more if cold temperatures in the coming months increase demand, investors say. Shortages of natural gas and wind power have pushed up electricity prices in Europe.
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The trend is spreading to industrial metals needed to make cars and electric homes. Copper prices hit all-time highs in May, in part due to supply disruptions and project delays caused by environmental concerns everywhere from Minnesota to Alaska. Aluminum has skyrocketed in recent weeks, supported by limits on the amount of energy that aluminum smelters in China can consume.
While environmental concerns are not new to companies that consume large amounts of electricity and water and often contribute to local pollution, commodity investors say the global reach of the recent surge is unprecedented. Some argue that commodities enter a cycle defined by erratic supply and volatile prices as the ability to stimulate production declines.
For some commodities, “you’re rightfully on the precipice of not having enough,” said Rory Johnston, a former bank economist who now writes a commodities newsletter. “It is fragile and increasingly difficult to predict the results.”
As it becomes increasingly difficult for large companies to develop new sources of raw material supply, some companies are investing millions in recycling old materials and green production methods. Some analysts also expect private companies and countries with less environmental control, such as the Organization of the Petroleum Exporting Countries and their allies, to increase their supplies and capitalize on higher prices, thereby giving them more influence in these markets.
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The successful campaign by a climate-focused activist investor to win seats on the board of Exxon with a small stake in the company earlier this year was love at first sight for all commodity producers, the forcing them to accelerate their climate goals, according to investors. Chevron braced for a similar challenge for investors, The Wall Street Journal reported earlier this month.
Many companies are also reluctant to increase their production spending after past increases in supply have pushed commodity prices down, an additional force that keeps many producers cautious.
“Even if they decide to spend the money now, it will take some time for the spending to actually get done,” said Darwei Kung, head of commodities and portfolio manager at DWS Group.
One of the reasons some investors are particularly bullish on metals like copper, aluminum and lithium – a key component of rechargeable batteries that power electric cars – is that demand for these materials originates from Green energy projects are expected to increase even as environmental concerns limit supply.
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U.S. officials have said they want to increase domestic production of critical materials like lithium, but projects in California, Nevada and North Carolina face local opposition and lengthy approval processes. Lithium prices have jumped in recent months.
Greater environmental pressure in the United States could keep the country dependent on dominant foreign players like China for many minerals, analysts say. Another result could be that the already expensive climate fight becomes even more expensive or takes longer, they say.
“There are so many unintended consequences with all of these developments,” said Adam Rozencwajg, managing partner of natural resources investment firm Goehring & Rozencwajg Associates, which is betting on rising commodity prices through ‘actions of producers. “Things are moving so fast.”
China has even released stocks of petroleum and industrial metals in recent months to calm the recent rise in prices.
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Yet some investors are skeptical that these and other sources will fill supply gaps in the long run, in part because there are now few parts of the world that are immune to environmental pressure. .
“It matters everywhere now,” said Chris LaFemina, metals and mining analyst at Jefferies, who expects the limited supply to help push prices up. “Most of the factors limiting supply are now linked to environmental issues.