Key takeaways
Commodity prices have been relatively flat overall since late 2023.
However, prices of some key commodities such as oil and copper are trending higher in 2024.
Global economic growth trends often play a significant role influencing commodities markets.
Commodities represent close to 36% of the Consumer Price Index (CPI) calculated by the U.S. Bureau of Labor Statistics. More specifically, energy represents about 7% of the index and food more than 13%.1 Consumers are directly affected by commodity prices for essential needs, which impact expenses like groceries, gas to fuel motor vehicles and home heating and cooling.
Yet at the same time, the Federal Reserve (Fed), which sets monetary policy in an effort to maintain moderate inflation, tends to put less emphasis on price changes in volatile categories like energy and food. Those categories are viewed by the Fed as less indicative of overall inflation trends. Nevertheless, recent upward moves in oil prices have likely contributed to a leveling off of what had been a trend, since mid-2022, of declining inflation.
“The direction of oil prices will likely be determined by factors like economic growth trends that potentially fuel demand, along with decisions by OPEC on managing production output,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “While oil prices rose in early 2024, they have not broken through to dramatically higher levels. This signifies a favorable supply-demand balance in the market.”
For all of 2023, commodity prices across the board rose just 0.8%. By contrast, commodity prices rose by 12.1% in 2021 and 4.8% in 2022. For the 12 months ending in April 2024, commodity prices as measured by the U.S. Bureau of Labor Statistics were essentially flat, rising just 0.3%.1 Annualized commodity price changes have been below 1% since October 2023, and below 2% over the previous year.
What is the likely direction of commodity prices going forward, and how might investors consider positioning their portfolios to reflect these trends?
Energy prices are among the most visible of commodities, a category subject to significant volatility, often driven by world events. Crude oil prices closed just above $10/barrel in April 2020 as the onset of the COVID-19 pandemic caused a global economic virtual shutdown. Shortly after Russia invaded Ukraine two years later, the price of a barrel of crude oil topped $120, partially reflecting concerns about the availability of oil from Russia, one of the world’s top producers. Yet supplies expanded quickly, and from late 2022 until August 2023, the price of oil mostly traded in a range of $70 to $80/barrel. It jumped to more than $90/barrel in September 2023 before dropping to $70/barrel by mid-November. However, in 2024’s opening months, oil prices again moved higher, topping $80/barrel by mid-March and remaining at that level through April before again dropping below $80/barrel in May.2
Haworth says demand for oil has remained relatively constant, but that could change. “Summer driving season is approaching in the northern hemisphere, which tends to boost demand.” Adding to the stress is that a number of countries associated with the OPEC+ oil cartel extended voluntary production cuts through 2024’s second quarter as a way to keep prices elevated. “OPEC hasn’t extended output cuts, so the market seems to have adjusted to current levels,” says Haworth. “In the meantime, U.S. inventories are rising, which relieves some price pressure.” Events in the oil-rich Middle East bear watching as they could have an impact on supplies. In the wake of the Israeli-Hamas conflict, tensions between Israel and Iran briefly surfaced in April, but then faded. “For now, at least, it appears that the risk of a stepped-up conflict between Israel and Iran has subsided, which should alleviate immediate concerns about an impact on oil supplies,” says Haworth.
“The direction of oil prices will likely be determined by factors like economic growth trends that potentially fuel demand, along with decisions by OPEC on managing production output,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
It wasn’t just oil prices affected by the conflict in Ukraine. “The Russia-Ukraine war and potential interruptions of grain deliveries from those two agricultural-exporting countries added a degree of uncertainty to the grain commodities market as well,” says Haworth. Yet he believes that, as is usually the case, weather remains the biggest factor affecting prices for agricultural commodities. “Wheat, corn and soybean prices rose in mid-summer 2023, but not above previous high levels,” says Haworth. Food prices have since eased from earlier highs. For the 12 months ending in April 2024, food costs, as measured by CPI, were just 2.2% higher than a year earlier, compared to the overall inflation rate of 3.4%.1
Metals prices can be considered in two categories – precious metals such as gold and silver, and industrial metals used in manufacturing, such as nickel and copper for electric vehicle batteries. Gold prices dropped to a low of $1,831/ounce in October 2023, but rose more than 30% by mid-April 2024, to $2,413/ounce.3 It’s not clear whether the upward trend will continue, but a persistent inflation rate in excess of 3%,4 with few signs of an immediate decline, may explain gold’s renewed popularity.
As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. Minerals such as cobalt and nickel are key components for electric vehicle batteries.
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. Given that inflation remains stubbornly high in today’s environment, “markets today offer a good opportunity to add some commodity exposure,” says Eric Freedman, chief investment officer, U.S. Bank Wealth Management.5 The environment may present the potential to diversify into infrastructure, real estate, precious metals and agricultural products, all of which can benefit as prices rise.
Infrastructure options include companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. “There is strong demand in many of these areas today,” says Haworth, “but benefitting from owning these investments doesn’t always require that prices move higher. These investments also generate regular income for investors.” Haworth says companies in infrastructure-related businesses tend to have fixed costs but realize bigger profits in times when inflation drives prices higher.
Haworth says commodities sometimes are more effective as a tactical position in a portfolio. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns. “However, commodities historically offer positive returns in environments of elevated inflation, as we are seeing now.”
Investors should be prepared for frequent changes, both higher and lower, in commodity prices. Talk with your financial professional about opportunities to position your portfolio to capitalize on market trends stemming from the commodities trade.
Commodity prices, such as crude oil and agriculture products, rose in 2021 and 2022, partly due to supplies failing to keep pace with growing demand. Rising commodity prices contributed to increased inflation during that period. Through most of 2023, commodity prices in general moderated, declining significantly from previous highs. This reflected improved supply and lagging demand, particularly for specific products such as oil and natural gas. Through April 2024, oil prices moved higher, but leveled off again in May, according to the U.S. Energy Information Agency.
Typically, changes in commodity prices can drive inflation trends. According to the U.S. Bureau of Labor Statistics, commodities make up close to 36% of the Consumer Price Index, the most commonly watched inflation measure. When inflation began to surge in 2021 and 2022, higher commodity prices, such as for food and gasoline, played a big role. When inflation numbers improved after peaking in mid-2022, declining energy prices and slowing food costs also played an important role.
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. But it can be difficult to earn a durable return with direct investments in commodities or commodity futures. Investors must be aware that commodities tend to be a volatile asset class, and it is difficult to choose the right time to invest when prices can shift significantly in a short period of time. One effective way to capitalize on today’s commodities market is through investments in infrastructure. This includes companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. Along with capital appreciation potential, these investments also tend to provide a regular income stream.
With the Federal Reserve maintaining higher interest rates for longer to get inflation under control, what opportunities does this create for bond investors?
When will the Federal Reserve start cutting interest rates?
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