A massive productivity wave in U.S. shale, which collapsed cost curves, began in 2011 and prompted a secular bear market in oil that has since extended to other commodities. History has shown that commodity cycles tend to last 15 to 20 years on average, and we continue to believe that there is more room for productivity to improve and for the bear market to persist. The secular dynamic of productivity-driven oil price deflation was exacerbated in early 2020 by dual demand and supply shocks hitting the market, creating unprecedented pressure on market balance and ultimately driving West Texas Intermediate (WTI) prices briefly negative in a clear signal that oil production needed to be swiftly and meaningfully curtailed.

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The global spread of the coronavirus effectively shut down many large economies around the world and drove a negative demand shock which far exceeded any weakness previously seen in oil. Historic data shows that, oil prices overshoot to the downside after demand shocks, as supply curtailments initially lag falling demand; conversely, supply lags in response to demand recovery, allowing oil prices to overshoot to the upside before eventually normalizing. We continue to expect the normalization of prices to reflect the underlying cost curves more closely over time but predicting the magnitude and duration of this process has now been complicated by multiple exogenous factors such as weather, geopolitics, and broader economic supply chain and inflation challenges. The ongoing conflict in Ukraine, in particular, has amplified near-term uncertainty and volatility in the commodity markets. While we continue to expect a normalization of prices as some of these exogenous factors reverse and productivity continues to improve, we recognize that we cannot know exactly how the Ukraine crisis will unfold going forward, exacerbating the high level of uncertainty around the timing and path of normalization.

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Nevertheless, we are likely to see some changes based on what has already occurred thus far that would make the normalization process for some commodities take longer than others. For instance, we think that global gas/LNG prices are likely to remain elevated for longer as there is no quick or easy way for Europe to structurally reposition away from its Russian gas dependence since gas cannot be as easily re-routed as oil given the long lead times of infrastructure. This then creates second-order effects on other commodities, such as fertilizers and other agricultural products, that rely on gas in the production process. What further complicates the landscape is the fact that some commodities are now pricing up to demand destruction levels in order to rebalance inventories. This is therefore increasing the odds of an economic recession which, in turn, has dampened the demand outlook for basic metals, resulting in a significant pull back across the industry.

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We have maintained our disciplined approach and remain committed to our data-driven, bottom-up stock selection process and our philosophy of buying and holding a diverse selection of fundamentally sound natural resources companies with solid balance sheets and trusted management. Our expansive global research platform continues to assist in identifying those companies that we think can provide long-term capital appreciation for our shareholders, and we believe that the market will reward our disciplined and consistent approach to investing over the long term.