On Natural Resources

Exploiting Opportunities Amid A Secular Commodity Downturn

Shawn T. Driscoll, Portfolio Manager of the New Era Fund
Key Insights
  • Commodities are still in the middle stage of a secular downcycle that may last several more years, driven by an imbalance between global supply and demand.
  • With the surge in U.S. oil production and productivity, oil prices will average USD $40 to USD $50 per barrel longer term but could possibly hit USD $30 per barrel in 2019 or 2020.
  • Despite these challenges, there are pockets of opportunity, including specialty chemicals and other industries, that benefit from lower commodity prices.

Q. Why should investors consider a natural resources strategy for part of their portfolio?

First, there are always opportunities to invest in quality companies benefiting from broader commodity trends, even in a depressed era for commodities. Investing in natural resources has historically provided an effective hedge against inflation—and deflation for that matter.

A Volatile Trend in Oil Prices

Wide fluctuation in oil prices since 2014
As of December 31, 2018

Past performance cannot guarantee future results.

Sources: U.S. Energy Information Administration and Chicago Mercantile Exchange.

Note: West Texas Intermediate (WTI) reflects the U.S. price for oil, and Brent crude reflects the global oil price. Both declined sharply from 2014 to mid-2016 before recovering, only to crash again toward the end of 2018.

The Real Price of Oil Since 1861

Prices above USD $40 per barrel are unusual
As of December 31, 2018

Past performance cannot guarantee future results.

Sources: BP Statistical Review, Ned Davis Research, and data analysis by T. Rowe Price.

Historically, natural resources equity performance has run somewhat counter to overall equity performance, so the sector can provide diversification and help offset weak performance in overall global equities. Commodities also can provide currency diversification because they have a negative correlation with the dollar. When the dollar strengthens, commodities tend to really struggle, but when the dollar weakens, they have tended to do extraordinarily well.

Even when natural resources lag the overall market, we believe attractive performance can still be achieved. We don’t expect the energy sector to outperform broader equity markets for a sustained period, but there have been times, as in the second half of 2017 and early 2018, when energy prices and stocks surged due to any number of catalysts. Even from 1986 to 1999, a challenging period for commodities, there were several significant price rallies. So it makes sense to keep some allocation to resources for their potential diversification benefits.

Download the full article.

Exploiting Opportunities PDF

The commodity downcycle may last several more years, but there are still some attractive opportunities for performance.

Important Information

Download a prospectus.

All investments are subject to market risk, including possible loss of principal. The fund may underperform when economic growth is slowing and the level of inflation is low. Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path. Factors such as natural disasters, declining currencies, market illiquidity, or political instability in commodity-rich nations could also have a negative impact on various portfolio holdings and cause a drop in share prices.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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