Investors bet environmental fears will crunch commodity supply, lifting prices

Investors are ramping up wagers that a global push to lower carbon emissions will hamper commodity production, pushing up prices for 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 are limiting spending on new output. The caution comes after years of declining investments in production that were driven by lackluster commodity prices and a focus on returning money to shareholders, analysts say.

Spending on oil and gas exploration and production is now forecast to edge higher in the coming years but stay below 2019 levels and about 40% to 50% under a 2014 record, figures from consulting firm Rystad Energy show. Even with prices for metals like copper also at their highest levels in years, annual spending by mining companies is projected to remain about 30% or more below a 2012 peak each of the next five years, according to data compiled by investment bank Jefferies.

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Bets on supply disruptions and recovering demand are already increasing raw-materials costs for consumers and companies and fueling investor anxiety about climbing inflation. While the short-term outlook for demand is murky due to the spreading Delta variant of the coronavirus and turmoil engulfing heavily indebted property developer China Evergrande Group, some analysts still expect limited supply to support commodity prices. 

Following recent price gains, an index of commodities is now on pace for its largest annual percentage advance on record in data going back three decades, according to FactSet. This year’s climb in oil has consumers paying some of the highest prices in years for gasoline, pushing the average U.S. price of a regular gallon to about $3.20, data from price tracker GasBuddy show. 

Brent crude, the global gauge of oil prices, added 1.4% to $77.25 a barrel on Thursday, hitting its highest level in almost three years. 

Natural gas, used as a power-generation fuel to cool homes in the summer and heat them in the winter, recently hit 7½-year highs above $5 a million British thermal units. Prices could shoot even higher if cold temperatures in the coming months lift demand, investors say. Shortages of natural gas and wind power have sent European power prices to records.

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The trend extends to industrial metals that are needed to manufacture electric cars and houses. 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. In recent weeks, aluminum has soared, buoyed by limits on how much power aluminum smelters in China can consume.

While environmental concerns aren’t new for companies that consume large amounts of power and water and often contribute to local pollution, commodity investors say the global scope of the recent push is unprecedented. Some argue that commodities are moving into a cycle defined by erratic supply and volatile prices as the capacity to boost production dwindles. 

For some commodities, "you’re legitimately on the precipice of not having enough," said Rory Johnston, a former bank economist who now writes a newsletter about raw materials. "It’s fragile and increasingly difficult to forecast the outcomes."

As it gets tougher for large companies to develop new sources of commodity supply, some firms are investing millions in recycling old materials and green production methods. Some analysts also expect private companies and nations that face less environmental scrutiny such as the Organization of the Petroleum Exporting Countries and allies to boost supplies and capitalize on higher prices, giving them more influence in these markets.

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A climate-focused activist investor’s successful campaign to win board seats at Exxon with a tiny stake in the company earlier this year was a shot across the bow to all commodity producers, forcing them to accelerate their climate goals, investors say. Chevron has prepared for a similar investor challenge, The Wall Street Journal reported earlier this month. 

Many companies are also wary of lifting spending on output after past supply increases sank commodity prices, an added force that is keeping many producers cautious.

"Even if they decide to spend the money now, it will take some time for the spending to actually come in," said Darwei Kung, head of commodities and portfolio manager at DWS Group.

One reason some investors are particularly bullish on metals like copper, aluminum and lithium—a key component of the rechargeable batteries that power electric cars—is that demand for these materials from green-energy projects is expected to surge even as environmental concerns limit supply. 

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U.S. officials have said they want to increase domestic production of critical materials such as lithium, but projects in California, Nevada and North Carolina face local opposition and lengthy permitting processes. Lithium prices have surged in recent months.

Greater environmental pressure in the U.S. could keep the country reliant on dominant overseas players like China for many minerals, analysts say. Another result could be that the already-pricey climate fight gets even more expensive or takes longer, they say. 

"There are so many unintended consequences with all these developments," said Adam Rozencwajg, managing partner at natural-resources investing firm Goehring & Rozencwajg Associates, which has been betting on higher commodity prices through shares of producers. "Things are moving so fast."

China has even released stockpiles of oil and industrial metals in recent months to cool the recent price rally. 

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Still, some investors are skeptical that those and other sources will fill longer-term supply gaps, in part because there are now few parts of the world that are free from environmental pressure.

"It now matters everywhere," said Chris LaFemina, a metals and mining analyst at Jefferies who expects constrained supply to help lift prices. "Most of the limiting factors on supply are now related to environmental issues."