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The unstoppable progress of urbanisation across Asia is driving a demand for commodities that supply is struggling to meet. With oil and gas fields and mines maturing and depleting, and yielding less output per unit investment, the world looks to have shifted structurally to a higher price environment for many commodities. While forecasting commodity prices is a dangerous game, few can imagine oil ever again trading significantly below $40-$50 per barrel for any extended period of time. Furthermore, recent global events suggest oil is much more likely to remain closer to $100 per barrel than $50 per barrel. In fact, demand for oil is underpinned by three factors that are independent of the currently sluggish growth in the world economy. First, the Fukushima nuclear disaster in 2011 increased Japan's dependency on oil for power generation. Second, Libyan oil has struggled to return to pre-civil war levels and its political instability is unlikely to allow the resumption of stable full production anytime soon. Finally, the wider 'Arab Spring' has destabilised the Middle East and caused governments and monarchies to increase social spending. They will require oil prices to stay above $100 per barrel in order to keep morale high in their countries. Transformational tech One indeterminate factor that could have a material impact on future commodity prices is technology. Oil and gas and mining companies are constantly developing new ways to improve the economics of extraction. The widespread use in recent years of horizontal drilling and hydraulic fracturing has completely transformed the ability of the oil and gas industry to produce natural gas from shale and other challenging rock formations, and is now also being applied to shale oil. Royal Dutch Shell, arguably the most innovative oil major, is hopeful that several of the new technologies it is developing could prove equally transformational. Most notably, the group is developing the enormous "Prelude" floating liquefied natural gas (FLNG) platform that will be moored off the west coast of Australia. If successful, the design plans could be replicated with minimal alteration for other gas fields. This could have huge significance as the world is dotted with remote gas discoveries that can't currently be developed because their size doesn't justify the substantial capital expenditure needed to connect them to land-based processing facilities. FLNG could be the key that unlocks such 'stranded' gas reserves by extracting and processing gas offshore on floating platforms such as Prelude. Only time will tell whether FLNG will prove as transformational to the oil and gas industry as horizontal drilling and hydraulic fracturing. Stores of value The short-term outlook for metals is more mixed, though generally, like oil and gas, upbeat. In particular, the outlook for precious metals continues to be underpinned by the poor state of the global economy. The actual and expected extensions of quantitative easing in the US and UK and long-term, ultra-low interest rates there and elsewhere to stimulate economic activity, and the ongoing threat of a break-up of the euro all support a stronger gold price, with silver likely to follow as an alternate store of value. There are also good prospects for base metals. In particular, there is continuing tightness in copper supply given the declining grades of major mines while few new large deposits are being discovered, despite greatly increased spending on exploration. In other base metals, zinc is expected to benefit as supply tightens following the expected near-term closures of major mines. The nickel price has fallen substantially in recent years and could also recover, although any major upward move is likely to see the substitution of nickel by cheaper, poorer quality nickel pig iron, which could limit the upside in the nickel price. Iron ore is fundamental to infrastructure development and therefore urbanisation. Medium-term supply could slip into surplus if many of the west African mega projects make it into large-scale production. However, this is far from assured, particularly as projects compete for substantial funding requirements against an uncertain economic backdrop. Projects offering early production and improved project economics through 'direct shipping ore', which can be sold without major processing, will be preferred. Coal offers more assured medium-term fundamentals among bulk commodities and the uranium price is also likely to recover as nuclear programmes resume following a temporary post-Fukushima halt to review and improve safety. Specifically, the aggressive nuclear ambitions of China, Russia and India are likely to more than offset planned reductions in a small number of developed nations following the Japanese disaster. Yet, despite the positive fundamental outlook for many commodities, there remain significant risks to near-term performance. Most notably, the continuing eurozone debt crisis is expected to drag Europe back into recession - and would already have done so were it not for the offsetting strength of German exports - and therefore consuming fewer commodities. Meanwhile, the US economy remains sluggish, despite efforts to stimulate growth. Another threat to oil and gas and mining companies is the escalation of resources nationalism, with governments around the world looking to claim their share of higher commodity prices. The situations in Zimbabwe, Democratic Republic of Congo and Australia are well documented, and South Africa looks as if it is considering a similar policy. Countries considering wholesale resources nationalisation are often warned that to do so risks committing "economic suicide". Arguably, the biggest danger is that countries will cite Chile- where the national copper company, Codelco, grew from (among others) nationalised assets - as an example where resources nationalisation could be construed as having proven successful. Against such a confused backdrop, shares are unlikely to pick up for at least a quarter or two, with the continuing eurozone crisis a wildcard banking sector issue that could have serious repercussions for stockmarkets and investors. There is no easy solution to the European crisis - otherwise it would already have been solved. But a solution will be found and we should see at least the start of a recovery in 2012. However, equities are pricing in much lower commodity prices than currently prevail and could rally long before the bottom of the economic cycle. If so, the next few months could be an excellent time for investors to pick up some bargain oil and gas and mining shares. Our oil and gas and mining share tips have made readers average returns of 81% over a two-year period. With resources gains driven by an unstoppable phenomenon sweeping across the globe, you may never get another chance to make such profits. Visit the website below to start receiving the same investment alerts.
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