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Commodities have performed well so far this year, with the energy sector a standout and lean hogs and steel prices up sharply, as overall expectations for a global recovery.
Looking at commodity prices in the months ahead, the market isn’t concerned about “the next strain of potentially mutated Covid in Europe,” says Adam Koos, president of Libertas Wealth Management Group. “Price trends are supporting the thesis that the overall economy is going to continue to improve.”
Year to date, the S&P GSCI index
SPGSCI,
which tracks 24 exchange-traded commodity futures contracts, has climbed roughly 16% year to date as of March 24. The subindex S&P GSCI Energy Index
SPGSEN,
trades about 24% higher.
Investor optimism over an improving demand outlook from the rollout of the Covid-19 vaccines raised prospects of lockdowns being lifted for good, and helped fuel a rally in commodities that rely on economic activity, says Fawad Razaqzada, market analyst at online brokerage ThinkMarkets.
However, that upbeat outlook has “weighed on haven assets like gold and silver,” which have also been hurt by rising bond yields.
Gold futures
GCJ21,
GC00,
based on most-active contracts as of March 24, trade nearly 9% lower this year, with silver
SIK21,
SI00,
down over 4%.
Razaqzada attributes oil’s “outsize recovery” to the climb from the historical drop to negative prices for West Texas Intermediate crude back in April 2020, supply restrictions by the OPEC+ alliance, and an improving demand outlook.
This year, as of March 24, front-month futures for U.S. benchmark West Texas Intermediate crude
CLK21,
CL.1,
trade around 26% higher, with global benchmark Brent crude
BRNK21,
BRN00,
up 24%. Among energy commodities, gasoline futures
RBJ21,
RB00,
are a standout, up around 41%.
Regardless of “how and where we work for our employers,” oil and gasoline, in particular, point to higher demand globally, and travel is set to recover, says Koos.
Other commodities with outsize gains this year also include lean hogs
LHM21,
LH00,
up 45%, and steel
HRNJ21,
up over 40%, on the futures markets.
A rise in Chinese demand, following Phase One of U.S.-China trade deal, the devastation to China’s hog herds caused by African Swine Fever, and skyrocketing U.S. demand for pork is behind the “fantastic” market for hogs, in terms of export and cash trade, says John Payne, senior futures & options broker with Daniels Trading. Also, on a seasonal basis, the best time for hog rallies is leading into the summer, he says.
Meanwhile, strength in U.S. Midwest domestic hot-rolled coil steel “clearly supports the theory that prices are forward-looking,” Koos says. There’s likely to be more government-directed projects focused on infrastructure, and steel will be a beneficiary of these projects, he says.
However, the price climb for iron ore
TIOJ21,
which trades up almost 7% for the year, pales in comparison to steel’s rise. Some analysts warn that China’s pollution reduction efforts may lead to restrictions on steel production, with demand for iron ore set to take the first hit.
Given the sizable gains for commodities so far this year, however, the asset class “probably needs to take a bit of a breather here,” Koos says. That doesn’t mean “perpetually” lower prices long term. “After such a strong move since late-2020, commodities could use some time to consolidate and chop sideways.”
Koos sees higher commodity prices in the future, as long as the Invesco DB Commodity Index Tracking Fund
DBC,
a proxy for investing in commodities, breaks above the former floor of support at $18. If the DBC exchange-traded fund is above that key level, “then I’d want to be long commodities,” he says.
