2021 Outlook: Resources

The stage is set for a rebound in commodity prices in 2021, as global infrastructure spending boosts demand for mined commodities and the transition to clean energy creates opportunities. The BlackRock Natural Resources team gives its thoughts on the year ahead.

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The rebound in global economic activity remains robust, while COVID-19 vaccine developments provide greater certainty around growth. Against this backdrop, mined commodity prices have performed well, and we expect them to be well supported at these levels.

Supply has been impacted by COVID-19-related disruptions and inventories are low relative to history for most commodities. We expect constraints on supply to continue given the underinvestment of recent years and strong capital discipline from mining companies.

Meanwhile, commodity demand should continue to be buoyed by increased global infrastructure spend as governments seek to kick-start their economies. At the same time, the transition to a lower carbon global economy should also support demand for certain mined commodities.

For the mining companies themselves, balance sheets are in good shape, while earnings and dividends are rising.

There are strong arguments for inflation exceeding current expectations and, historically, the mining sector has performed well on an absolute basis and relative to broader equity markets during periods of rising inflation.

Energy outlook

We continue to expect a low and volatile oil price in the near term as we work through COVID-19 second waves. However, we are continuing to see inventories fall and expect progress on vaccine distribution, which would provide more confidence for a recovery in demand. Despite the near-term challenges for oil markets, we are becoming increasingly bullish on the sector on a 2+ year time frame and reaffirm our view that normalised oil prices will return to the USD $60-70/bbl range.

While the recovery is likely to remain choppy as we go through additional lockdowns, Asian demand recovery bodes well for the rest of the world’s recovery, as and when lockdowns are eased. The Organization of the Petroleum Exporting Countries (OPEC) is also continuing to manage the supply side, with energy companies showing no appetite to shift away from capital discipline.

Oil prices may remain low and volatile for the coming months and, with lower inventories and some withdrawal of capital, we are likely to move to a more balanced market by this time next year. Large stimulus from central banks and governments suggests the potential for inflationary pressures to rise post recovery is growing and energy equities have historically performed well in such environments.

Shorter term, on the demand side, efforts to contain the coronavirus have already hit oil demand. The larger-cap energy companies look well-placed to weather the storm. Versus the 2015/16 oil price correction, they are entering this downturn with stronger balance sheets, better cost oversight and a larger proportion of short-cycle investments that can more easily be pared back.

Prior to this current demand shock, we were anticipating a meaningful slowdown in growth of US shale (high quality crude oil that lies between layers of shale rock) and we are already seeing a supply response from non-OPEC countries to the lower oil prices, with year-over-year capex cuts across the board. Ultimately, sharply lower oil prices today, amplifies the likelihood of a medium term and sustained up-cycle driven by under-investment.

Sustainable energy outlook

Economic stimulus post coronavirus, such as the EU’s Green Deal, is likely to be focused on green industries and we believe should therefore benefit sustainable energy companies. 

Sustainable Energy is supported by the acceleration of the transition to a lower carbon economy. Renewable energy costs for onshore wind and solar photovoltaics (solar PV) are now at grid parity in certain markets and this type of power generation now represents the most economic choice, which is driving rapid adoption with over 1200GW of new capacity by 2024 (which is equivalent to total US electricity production). We see similar cost competitiveness trends in other areas such as energy efficient lighting and energy storage solutions in automotive electrification.

The path to a lower carbon global economy is forecast to disrupt many industries and business models. However, this evolution is also expected to create remarkable opportunities. To quantify, the International Energy Agency (IEA) estimated that over USD $20 trillion will be invested in the sector through 2040, an average of nearly USD $1 trillion per year1. We believe that the scale of the growth opportunity for the sustainable energy sector as a whole over the coming years has been under-appreciated both as a play on capital allocation and attractive long-term investment exposure.

All amounts given in USD, unless otherwise stated.

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of January 2021 and may change as subsequent conditions vary.

1International Energy Agency, May 2020.