- Commodity prices could remain structurally higher for decades to come, according to BlackRock.
- BlackRock expects higher oil prices to be driven by a lack of investment in supply, combined with rising demand.
- "Even with improving energy efficiency in developed markets, global energy demand could rise significantly," BlackRock said.
Commodity prices will remain "structurally higher" for decades to come as supply fails to keep pace with rising global demand, BlackRock warned in a Tuesday note.
The investment giant sees oil prices remaining at elevated prices as Western countries attempt to reduce their energy reliance on Russia, and as investment fails to keep pace to meet rising energy demand.
"The flow of Russian gas into Europe has fallen by two-thirds already in just a few months. This is a structural change, and we see it as part of accelerating geopolitical fragmentation. The supply crunch is rooted in years of declining investment from traditional energy companies and forecasters expect even less in years to come," BlackRock said.
The lack of investment mainly stems from investors pushing for more capital discipline from operators as long-term concerns grow about the sustainable demand for traditional energy. And energy producers were conditioned to maintain operating discipline after over investing in the space during the 2010's, resulting in poor stock performance.
"Energy commodities prices are likely to be supported by growing energy demands amid tight supply in coming decades. Even with improving energy efficiency in developed markets, global energy demand could rise significantly, especially if energy consumption in emerging markets jumps as living standards approve," BlackRock explained.
As commodity prices rise, clean renewable energy sources will likely fail to fill the gap to meet demand, as investment in those sectors has also been lackluster, BlackRock said. "It would be nearly impossible to meet energy demand in coming years without fossil fuels."
And it's not just oil that will find itself in a structurally higher regime of elevated prices, BlackRock said, highlighting that metals are essential to building out renewable energy.
"Transition essentials like wind turbine farms and electric vehicles require staggering amounts of iron ore, copper, lithium and other metals to match fossil-fuel generated power sources' outputs," BlackRock said.
While BlackRock expects higher commodity prices in the long-term, rate hikes from the Fed and an economic recession could lead to short-term weakness and hurt demand for energy.
But that weakness represents an opportunity for investors, as it will give them tactical opportunities to buy energy stocks that will benefit from structurally higher prices in the long-term, BlackRock said.
"We think some of the greatest opportunities may be in carbon-intensive companies with credible decarbonization plans or companies supporting the transition with the supply of critical minerals," BlackRock concluded.
