What the economic environment means for commodities

Demand from China will contend with a potential recession in Europe and North America and keep the near-term outlook for oil volatile, a CIBC analyst says.

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Daniel Greenspan, senior analyst and resource team director with CIBC Asset Management, said China’s reopening and targeting of 5%+ GDP growth this year will be a driver of oil demand.

“We’re seeing signs of demand growth with industrial production numbers and with flight activity picking up in China in recent weeks,” he said in a late-March interview. “And we view that as a positive for energy demand.”

Demand risk comes from the U.S. and Western Europe, and whether or not central banks can engineer a soft landing, Greenspan said. If these key markets fall into a recession, then demand could moderate significantly.  

He pointed to bank failures in the U.S. last month that had a negative effect on pro-cyclical assets like oil.

Generally speaking, he said, supply fundamentals have been more predictable in recent years and remain supportive of oil prices. Greenspan was speaking before OPEC’s surprise production cut this week. 

Energy producers remain disciplined, he said, with strong balance sheets that have allowed capital to be returned to shareholders via dividends and buybacks. North American producers aren’t rushing to pump oil at elevated prices, he said, and OPEC has shown it is willing to do what’s necessary to support oil prices.

The ongoing Russia-Ukraine conflict, which was initially expected to put the world into an oil deficit due to sanctions on Russia, has instead seen a redirection of trade flows, Greenspan said.

“More Russian barrels than we expected are being brought to the market,” he said, with Asia the primary recipient. Western Europe is instead being supplied by the rest of the world. 

Looking past geopolitical events, Greenspan said his outlook for oil is positive over the medium term. Although the transition to a low-carbon economy will create headwinds, he said demand should remain robust in the meantime. He said the key to the longer-term outlook will be on the supply side. 

“We’re not seeing companies invest in the next generation of multi-billion-dollar long-life assets,” he said. “With an uncertain demand outlook and with political pressure to decarbonize economies, companies are focused on running existing assets more efficiently and returning cash to shareholders rather than on growth.”

The result will be a lack of new supply in the medium to longer term, and he said he expects further consolidation in the sector as a means for growth.

In terms of sector allocation, Greenspan prefers upstream producers over midstream and infrastructure companies because of stable balance sheets, growing dividends and attractive valuations. His top picks are Cenovus Energy and Canadian Natural Resources Ltd. 

Outlook for copper and gold

Despite the recent risk-off sentiment, Greenspan said the copper price has been “hanging in.” Historically, copper has been closely tied to China, so the outlook for the commodity is likely supported by the country’s reopening, he said.

Over the medium to longer term, copper becomes even more attractive. The transition to a low-carbon economy will be hugely copper-intensive, Greenspan said, and demand is set to accelerate.

In fact, he said a limiting factor to the energy transition will be the ability to mine the necessary commodities, and he predicts prices will move higher to incentivize the next generation of copper projects.

“We like the medium to long-term outlook for copper as a necessary commodity in the green economy,” he said. 

Lastly, gold has been strong as of late, Greenspan said, given the price is closely tied to the inverse of the U.S. dollar. Changing interest rate expectations and bank instability in the U.S. has weakened the U.S. dollar, and gold has once again “shown its worth” as a portfolio hedge in uncertain macroeconomic times, he said. 

“We think gold can outperform in an environment where the Fed is on pause and the market is on alert for recession risks,” he said.

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