Commodities Should March Forward, Despite Recent Step Back
July 13, 2022
Read Time 4 MIN
Macro Outlook: Supply Constraints May Propel Commodities Upward
Commodities had a sharp pull back in the month of June. The U.S. Federal Reserve raised interest rates by 0.75% and made it very clear to investors and markets that they were just getting started. This commitment to fighting inflation caused the U.S. dollar to continue rising and, for investors, start to price in a U.S. recession. This dramatic shift in expectations caused commodities across the board to decline, especially in the economically sensitive industrial metals sector.
Commodity indexes produced strong returns in the first half of 2022, despite the sharp declines in the month of June. The UBS Constant Maturity Commodity Index1 (CMCI) gained 15.7% in the first six months of the year, while the Bloomberg Commodity Index (BCOM) gained 18.4%. Overall, CMCI’s higher exposure to industrial metals, and lower exposure to natural gas hurt relative performance vs BCOM. Inflation and the Russia-Ukraine war kept commodities strong on concerns over commodity supply. We believe that this outlook for continued lack of supply has not changed and will likely keep commodities in a long-term bull market. Near term markets are adjusting to slower global growth expectations and fears over the demand outlook. The expected slower growth could reduce both supply and demand, leading to even stronger commodity price gains in the future.
Index & Sector Review: Energy & Agriculture Lead Performance
CMCI fell 8.0% in June while BCOM fell 10.8%.
The industrial metals sector led the decline, falling 14% in the month of June. Globally, investors started to worry about a near-term sharp economic downturn. This change in demand expectations caused a decline, especially in the most economically sensitive industrial metals sector. Nickel led the decline overall falling 20%, while copper fell 12%. This hurt CMCI relative to BCOM due to CMCI’s overweight in industrial metals.
The energy sector also declined 6%, despite the relative strong performance from heating oil and gasoline. Lack of U.S. refining capacity supported the performance of the products relative to crude oil. Natural gas fell sharply after Texas LNG Export Terminal was shut down due to a fire. This led the energy sector component to decline almost 30%. It also helped with CMCI’s relative performance to BCOM, which has a higher exposure to natural gas.
Improving weather in the U.S. Midwest caused a decline the agricultural sector; wheat fell 18% and corn fell 12%. The livestock sector was unchanged, while the precious metals sector fell 3%.
The energy sector was the clear winner rising 52% in the first six months of 2022. The Russia-Ukraine war disrupted supply of energy to Europe. Within the energy sector, the strongest performers were gasoil (+86%), heating oil (+73%), and gasoline (+56%). In general, a lack of global refining capacity and U.S. refining capacity, in particular, kept the products in short supply. Demand may fall as the global economy slows, but longer term, the war and supply constraints should keep all energy products in short supply and prices rising.
Agriculture was the second best performing sector, rising 13%. The Russia-Ukraine war was primarily responsible for the price gains. Wheat and soybeans were up 20% and corn was up 14%. Another early concern was late planting in the U.S. due to early spring weather. Growing conditions have since improved in the U.S. Midwest.
The livestock sector was unchanged in the first half. Precious metals fell 3%, led by a 13% decline in the price of silver.
The clear loser was the industrial metals sector, falling 9% in the first six months of 2022. China’s COVID lockdowns hurt demand expectations and, more recently, the decline in the outlook for global growth or possible recession have caused further declines in price, leading to copper falling 16%.
Index Sector Weightings
Source: VanEck, Bloomberg. CMCI data: 7/27/21; BCOM data: 5/31/22.
We believe that the supply outlook problem is unchanged and is likely to keep commodities in a long-term bull market. Near term markets are adjusting to slower global growth expectations and fears over the demand outlook. The expected slower growth could reduce both supply and demand leading to even stronger commodity price gains in the future.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
1 Effective July 1st, 2022, the index name changed from UBS Bloomberg Constant Maturity Commodity Index to UBS Constant Maturity Commodity Index (CMCI) and managed by MerQube Inc.. CMCI is a total return rules-based composite benchmark index diversified across commodity components from within specific sectors. Sector and components weights shown are based on CMCI’s Sub Indices and Single Component Indices.
Please note that VanEck may oﬀer investments products that invest in the asset class(es) or industries included in this blog.
This is not an oﬀer to buy or sell, or a recommendation to buy or sell any of the securities/ﬁnancial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, ﬁnancial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reﬂect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently veriﬁed for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
BCOM provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversiﬁcation does not ensure a proﬁt or protect against a loss in a declining market. Past performance is no guarantee of future results.
© 2022 VanEck
November 10, 2022
Commodity indexes have maintained good gains all year in the face of rising interest rates and the stronger U.S. dollar.
October 18, 2022
Resource equities maintained resilience in Q3, and we continue to believe they may be one of the more defensive sectors heading into a potential economic slowdown.
October 13, 2022
As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.
October 04, 2022
We believe the Inflation Reduction Act is a critical catalyst to accelerate the sustainable development of a sustainable green resources sector in the U.S.