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Top 5 energy commodity performers of 2021

After years of disappointment, commodity markets are now boiling hot! In fact, four fifths of commodities have seen their prices surpass pre-pandemic levels. We study energy commodities next.

Key takeaways 

  • Lithium surged 91.40% YTD because of a ramp up in EV demand.  

  • Coal rose 46.80% this year in what is dubbed a surprising turn of events. China takes center stage as a net exporter. 

  • Crude oil climbed 47.53% thus far, making the quickest recovery of all commodities despite oil demand remaining 5% lower than same time in 2019.  

  • Natural gas, especially LNG, has seen prices cooled off due to seasonality and weather disruptions, but YTD saw a price rise of 25.17%.  

  • Ethanol, the sugar, and plant-based energy is seeing some tailwinds and is up 71.67%.  

 

Energy commodities situation now 

We begin with what has become an increasingly apparent divergence, a growing spread between commodities and the S&P 500. Below, see the Invesco commodity index tracking fund in blue, versus the S&P 500 in red. So far this year, commodities across the board, and especially on the energy side, have seen a run of form not seen in decades. 

Figure 1: Invesco Commodity Index vs. S&P 500 
 

The energy sector has particularly impressed in 2021, even compared to industrial metals which bounced back from a decade-long slumber. Commodity markets are typically cyclical—they bend to the economy’s tune—and thus, during a time of economic recovery, they become interesting assets to study. The next graph shows raw input prices, where energy commodities beat the rest. 

Figure 2: Energy, industrial metals, agricultural GSCI spot indices 

We included lithium in our list because it has taken a driver’s seat in the energy transition narrative. A 91.40% YTD surge also justifies this pick and our re-classification of the industrial as an energy commodity. The following table shows you the key figures of top performers: 

 

Figure 3: energy commodity top performer metrics 

 

#1. Lithium: triple digits 

Lithium blew up in conjunction with a rising EV demand, but we begin with lithium because of its winning YTD performance of 91.40%.  

Earlier in the year, Chile’s second largest lithium producer, Albemarle (ALB), stated that global supplies of lithium would not be able to sustainably meet demand at low prices. ALB was pointing out the fact that EV manufacturers were sharks on price, but that this would only further strain producer supply and lead to a price surge. 

China-based Ganfeng, who is the largest lithium mining company in the world with a market capitalization of $19B, also predicted that lithium prices would rally because of these supply strains, which came to be true. But the Chinese love Lithium. Contemporary Amperex Technology, who supplies Tesla’s lithium carbonate, was recently helped by a new Chinese policy—a liquidity boosting policy and effort to maintain competitiveness in the world’s largest EV market. 

Since last July, prices have almost tripled. The next graph implies that a rising EV forecast is encouraging for lithium stocks, stocks that are highly correlated with EV manufacturers like Tesla, and Nio. 

See: Ganfeng Lithium, Albemarle Corp, SQM, Piedmont Lithium, Tesla, Contemporary Amperex Technology

Figure 4: Lithium-ion batteries forecasts 

 

#2. Coal: surprising 

In a highly unusual turn of events, coal has emerged as one of the best-performing energy commodities this year. Coal prices rose 30% on the quarter and have almost doubled since August, in large part because of supply disruptions. Year to date, coal prices have surged to $108/mt which is a 46.80% increase from pandemic lows.  

This is intriguing because coal has been under much scrutiny as a non-renewable source of energy. It goes against the current ESG zeitgeist, and in fact, most experts predicted that a double-digit rally for coal was something of the past. 

Despite increasing environmental pressures, coal remains the leading fuel for power generation around the globe. It remains more efficient and it remains cheaper than natural gas.  

What we have seen so far in 2021 is that a strong demand from China becoming a net importer of coal coupled with a recovery trade is most likely going to lead to more of what we have been seeing thus far.    

See: RamacoCONSOL EnergyBHP

 

#3. Crude oil: rebound

According to the World Bank, crude oil prices have seen the quickest recovery on record. From a pandemic-led price collapse oil has reached a high of nearly $70/bbl in mid-March, dropping to $63 in April only to rise again this month. Oil prices have been forecasted to surge to triple digits i.e., $100, by Bank of America analysts but risk remains around a recovery trade yet underway. WTI is up 47% and Brent has risen 44% year to date. 

The recovery has occurred despite oil demand remaining around 5% below 2019 levels, and it has been driven by higher-than-expected production cuts among OPEC partners.  

On May 1st, OPEC cut production by 9.7M barrels per day, with the cuts scheduled to begin declining on July 1st, according to agreements. OPEC suggested July production cuts will be equal to 9.6M barrels per day.US supply remains subdued as firms have held back production to conserve cash. Oil inventories have built up in the middle of last year due to an oversupply, and amid weak demand from lockdowns.  

See: UCOCRUDBRNT3097Cimarex Energy 

 

#4. Natural gas: LNG appeal

Natural gas prices have risen by one third in 2021 Q1, mainly as a response to cold weather in large markets. This effect is seen not just in the United States, where natural gas accounts for almost 25% of energy consumption, but also in Europe, and Asia—especially Japan. 

Moreover, a growing interest in its liquified form, LNG, makes for an interesting story as the maritime shipping industry begins increasing efforts for more LNG usage going forward. Here is a forecast of LNG export capacity with Qatar and Russia seizing dominant positions.  

 

Figure 5: LNG export capacity is ramping up 


 

On the other hand, the rally in natural gas futures appears to be slowing down mainly due to profit taking and a falling demand for cooling as the summer gets underway. Natural gas futures fell towards $3.18 per gallon after reaching a seven-month high of $3.35. 

See: COGLNGChevronExxonBP

 

#5. Ethanol: Biden-backed

Ethanol is picking up steam this year in part because of efforts by the Biden administration to mandate for renewable fuels. Ethanol is largely produced through fermenting starch or sugar-based feedstocks. Ethanol futures were trading at $2.46 per gallon, a level not seen since 2014.  

On the supply side, American ethanol producers slowed production outputs in an attempt to protect their margins, especially as corn futures reach an almost 8-year high point.  

Figure 6: corn futures prices surged to 2011 highs 

Biden’s disinterest in biofuel in favor of high-tech alternatives for green transport like EVs could be a growth risk for the commodity that so far this year has seen a 71.67% price increase. 

See: AemetixGreen PlainsThe Andersons

Conclusion 

Energy prices are forecast by the World Bank to grow 33% in the second half of 2021, and slightly less in 2022 as supply constraints fall and demand stabilizes to a new normal. Lithium has surged because of a ramp up in EV demand, Coal has risen to new heights in what is dubbed a surprising turn of events with China taking center stage as a net exporter, and crude oil has made the quickest recovery of all commodities with OPEC sealing a deal to increase production in July Natural gas has risen in demand, but prices are cooling off due to seasonality and weather disruptions, and ethanol is seeing tailwinds from a drive to see more renewable energies from the Biden administration.

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