3 Ways To Play The Next Commodity Supercycle

After a lackluster decade for commodities, a cross-section of Wall Street luminaries from Pimco to Point 72 is now predicting a broad commodity rally thanks to the so-called reflation trade. Indeed, Wall Street is predicting a new commodity bull market that will rival the oil price spikes of the 1970s or the China-driven boom of the 2000s.

Market experts, including Goldman Sachs, believe the commodity boom could rival the last “supercycle” in the early 2000s that powered emerging BRIC economies (Brazil, Russia, India and China).

The price movement of most commodities has historically been both seasonal and cyclical. 

Peering at the 10-year charts of leading commodities reveals a clear pattern of mean reversion where prices tend to oscillate backwards and forwards towards their mean or average. This fact alone lends some credence to the so-called commodity supercycle and offers the bulls some hope that it might not be long before the good times return.

Source: US Global Investors

That is already happening as we speak.

The Bloomberg Commodities Index (BCOM), the most widely used benchmark for the commodities market tracked by 23 exchange-traded contracts on physical commodities and approximately $85 billion in assets, has rallied 9.3% in the first two months of the new year.

The energy sector is the most heavily represented in BCOM with a 29.93% weighting, though gold is the best represented individual commodity with a 14.64% weighting.

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Interestingly, palladium, crude oil, and nickel emerged as the best-performing commodities for the past decade while natural gas, coal, and zinc were the worst performers.

Bloomberg Commodity Index

Source: Bloomberg

Without further ado, here are 3 energy stocks to play the emerging commodity supercycle bull.

#1. EOG Resources

EOG Resources (NYSE:EOG) is not only the largest shale producer but also one of the largest oil producers in the United States.

EOG is also one of the lowest-cost shale producers, needing crude prices at around $36 per barrel to break even.

EOG is spread across six separate shale basins, which gives it great diversification compared to its rivals who operate in one or two basins. The multi-basin approach also allows the company to grow each asset at an optimum pace to maximize profitability and long-term value.

Also, being smaller than oil majors such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) makes EOG nimbler and able to adapt to rapid changes in oil demand–a big plus during these uncertain times.

With oil prices well above the company’s breakeven level, EOG plans to use its free cash flow to pay down debt, buy back shares, and possibly even boost the dividend. Indeed, the company has just hiked its dividend by 10% after beating expectations for Q4 earnings and also raised its drilling budget by more than 8% to ensure production will stay flat for the rest of this year.

Looking ahead, EOG has pledged no increase in capex or production volumes in 2021. EOG says the 2021 capital budget will clock in at $3.7B-$4.1B, compared with $3.6B in 2020.

#2. Marathon Oil

Giant oil refiner Marathon Oil (NYSE:MRO) is one of the most popular stocks on stock-trading app Robinhood–and for good reason.

Oil field services companies and oil refiners have been hardest hit by the energy crisis, and Marathon Oil (NYS:MRO) and Valero Energy (NYSE:VLO) have not been spared despite oil prices appearing to have stabilized around $50. Indeed, Marathon Oil’s management is confident enough about the company’s outlook that it recently reinstated the dividend after suspending it in June, albeit at a lower rate of 3 cents a share compared to 5 cents before the cancellation. That modest dividend is good for a forward yield of 3.03%.

According to the company’s management, MRO becomes cash-flow positive at around $35/barrel, meaning the current WTI level of $61.50 gives it a nice cushion.

Despite rallying 69.4% YTD, MRO is still trading 25% below 2018 levels.

Marathon oil looks like a good bet due to its relatively strong balance sheet, including an untapped credit facility of $3 billion.

#3. Albemarle Corp.

Bullish tech markets are rarely without curious dislocations. And right now, one of the biggest imbalances can be seen in the huge momentum behind EV stocks such as Tesla Inc. (NASDAQ:TSLA) and the lithium market, which has remained in bear territory for years now. 

Over the past couple of years, a cross-section of analysts, including Goldman Sachs, have tried calling a bottom on lithium prices, reckoning on a significant contraction in supply as persistently low prices limited production of one of the key commodities in the EV powertrain. That has not happened. Related: Oil Prices Rally As U.S. House Passes Stimulus Package

And now one of lithium’s leading producers, Albemarle Corp.(NYSE:ALB), has just warned that global supplies of lithium are on course for a major shortfall by 2025 fall if prices do not rebound to fund expansions as EV demand explodes.

Eric Norris, who runs the lithium business for leading producer Albemarle, has highlighted the chasm between discount-hunting EV manufacturers and lithium producers who are unable to meet growing demand at current prices.

The lithium market appears to be finally waking up to this reality, with prices for battery-grade lithium carbonate in China soaring to 51.61% since the beginning of 2021 to $70,500 per tonne.

Deutsche Bank says Albemarle’s long-term bullish thesis remains intact despite the stock’s recent drop following disappointing FY 2021 guidance, and the company is poised to capitalize on anticipated 30% compound growth in lithium demand through 2025. DB has a $190 price target for ALB, good for 21% upside.

Meanwhile, BMO has maintained an Outperform rating with a $205 (30.5% upside) target on ALB, saying the company is “well positioned to benefit from sizable mid-term lithium demand growth including a large step-up in next year’s lithium volume.”

By Alex Kimani for Oilprice.com

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