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.
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