Commodities Expected To Hold Gains During Winter

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Commodity indexes have maintained good gains all year in the face of rising interest rates and the stronger U.S. dollar.

Macro Outlook: Commodities Supported by Steady Gains in Energy

October was a relatively quiet month for most markets, commodities included. The U.S. dollar was slightly lower despite U.S. 2-year yields rising by 20 basis points. The slightly lower dollar supported a small gain for most commodity indexes; the UBS Constant Maturity Commodity Index (CMCI) gained approximately 3.2%.

The U.S. Federal Reserve (FED) continues to raise interest rates to fight inflation, which has supported the U.S. dollar rally for most of the year. Commodity indexes have maintained good gains all year in the face of rising interest rates and the stronger U.S. dollar.

Once again, the energy sector was the star performer, gaining an estimated 8.8%. Supply constraints have broadly supported commodity markets ever since Russia invaded Ukraine in March. OPEC, plus Russia, surprised investors and the U.S. Administration in early October when they announced a cut in crude oil production.

Index & Sector Review: Natural Gas Prices Continue to Struggle Amidst Energy Gains

In the energy sector, WTI crude oil and Brent crude oil, both gained about 10% in October on the OPEC production cuts. However, natural gas prices fell during the month due to storage and pipeline capacity limitations. Europe has reached its LNG (liquified natural gas) import capacity, creating a backlog of tankers that are unable to offload their cargoes. The decline in natural gas prices helped CMCI’s relative performance vs the Bloomberg Commodity Index (BCOM); the latter has an outsized exposure to natural gas (approximately 13% vs CMCI’s 3%). There is a global shortage of diesel and heating oil and similar products because of limited refining capacity. U.S. heating oil gained 11% in October.

The agriculture and livestock sectors both made small gains for the month. Live hogs were up 11% and soybean oil gained 14%. Coffee and cotton both fell sharply, offsetting some of the gains.

Industrial metals were slightly lower on the month due to the continued China zero COVID policies, and precious metals fell 1% on a drop in gold prices.

As the year wraps up, we expect commodity prices to hold their gains during the winter months, especially if winter is colder than expected in the U.S. and Europe. It’s possible for most commodity indexes to trade back up toward the highs of this year.

CMCI Performance Relative to Bloomberg Commodity

Bloomberg. Data as of October 2022.

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