Pimco: Positive outlook for commodities in 2021

December 23, 2020

Overall, we are modestly constructive on commodities into 2021, believing that they will benefit from the global reflationary theme. However, we also have fairly differentiated views across different sectors. We are most positive on U.S. natural gas, where declining production of associated gas combined with producers focused on deleveraging means supply is likely to lag behind global demand growth. In oil, we expect inventory normalization and a continued rebalancing of the market. However, there are clear demand risks due to additional restrictions on mobility and these introduce considerable uncertainty to the outlook. Agricultural commodities have been supported by tightening balance sheets across major grain markets. From here, higher prices, will likely require a significant decline in Southern Hemisphere production over the coming months. The lower sensitivity of manufacturing activities to virus containment measures is supportive of base metals prices. Lastly, gold is attractive when viewed through the lens of historically low interest rates.

We believe that commodity prices are likely to move higher should the global economy continue to recover.  We expect demand for oil to increase over the foreseeable future, and underinvestment in upstream projects by non-OPEC producers creates upside for prices. While we are modestly constructive on prices, we are more balanced in our view as we see other forces that will offset some of this underinvestment.  1) Demand growth is likely to be more subdued than what we saw in the early to mid-2000’s; 2) Production costs have fallen steeply amid improvements in technology and higher prices will likely be met by increased investment in supplies; 3) Spare capacity remains with the lowest-cost producers in the world; and 4) Renewables will likely play an ever-larger role given increasing governmental and private sector focus on reducing greenhouse gas emissions and continued progress toward lowering renewable power costs.