Despite WTI and Brent oil prices hitting the highest levels since October 2014 earlier today, Shinwoo Kim, portfolio manager of T. Rowe Price’s Global Natural Resources Equity strategy, believes current commodity price levels are unlikely to prove sustainable:
“While we see the potential risk of further oil price upside in the next quarter or two, our conviction in the secular bear market for commodities remains intact.
We have seen this story before. The prices of crude oil and other commodities tend to overshoot on the downside to disincentivise production when there is a negative demand shock and then rebound, temporarily, to artificially high levels as demand recovers to stimulate a supply response and rebalance the market. Even amid a global economic recovery, higher oil prices are unlikely to prove sustainable and, in our view, should start to recede towards midcycle levels at some point next year.
The combination of what we regard as elevated valuations and commodity prices in the context of a longer-term bear market creates, in our view, an unfavourable risk/reward setup for many of the higher beta segments in the natural resource universe. Accordingly, we remain selective in our energy and mining investments.
Specialty chemicals is one area we like, as we believe the industry should benefit over the long term from lower commodity prices. The setup in companies that focus on paints and other coating products strikes us as potentially attractive. Historically, the best firms have been able to protect margins by passing along rising input costs to customers and then retained a portion of these pricing gains when oil prices eventually recede.”
