Commodities end best quarter in 32 years

Commodities ended their best quarter in more than 30 years after Russia’s invasion of Ukraine sparked a rally in markets from oil to wheat and nickel.

The war disrupted the flow of goods from the Black Sea, curtailing supply and causing sharp price volatility on the financial markets. Nervous investors are weighing the fallout from the conflict along with higher Federal Reserve interest rates that could threaten the post-pandemic economic recovery. At the same time, a sharp rise in commodity prices has some investors and economists worried that inflation could continue to rise from here.

The S&P GSCI, a benchmark that tracks commodity futures prices from precious metals to cattle, is up 29% in the first quarter, posting its biggest gain since 1990.

“When the supply and demand situation is tight and then there is another supply shock, it is not surprising that prices continue to rise,” said Chris Burton, global head of commodities and portfolio manager at Credit Suisse Asset Management.

US crude prices have risen 33% since late last year to $100.28 a barrel and rose to $123.70 by early March, a level last seen in 2008. This rally drove gasoline prices to record highs and kept consumers pumped.

The domino effects of higher energy prices have spread to other commodities. Wheat is up 31% this year, trading at its highest level since 2010, while corn is up 26%. Many metals – aluminum, copper, nickel and palladium – also made new highs.

The rally continues last year’s recovery, which was driven by higher consumer demand for goods and services as the economy reopened after the Covid-19 pandemic, coupled with a tightening of supply due to supply shortages and inclement weather.

The gains contrast with the performance of commodities over the past decade, when years of oversupply and low demand dragged prices down.

Commodity prices are hot right now. But the prices investors pay on the open market for commodities like coffee, copper, or corn may have little to do with the price customers pay in-store. WSJ’s Dion Rabouin explained. Pictured: Adele Morgan

The recent surge may even attract some investors who have avoided commodities for the past few years.

“She [commodities] It’s likely to have some investors taking a second look: “With inflation rates elevated, should I put commodities back in my portfolio?” said Karim El Nokali, investment strategist at Schroders.

Fed officials are closely watching the rise in commodity prices as they launch a campaign to raise interest rates to tame inflation. The central bank raised rates by a quarter of a point at its March meeting, and Fed Chair Jerome Powell has since hinted at the possibility of more aggressive rate hikes at upcoming meetings. This has helped push the yield on the 10-year Treasury note to its highest level in about three years.

But if the Fed hikes rates too quickly, analysts warn, it could result in a period of higher inflation alongside slower economic growth — a term known as stagflation, which hurt stock market returns in the 1970s.

Commodities are often viewed as an attractive hedge against rising prices of goods and services. Investors have poured money into general commodity funds and exchange-traded funds for 12 consecutive weeks through March 30, according to data from Refinitiv Lipper, the longest streak since a 23-week run that ended in June 2021.

Another bullish sign is that futures, which are tied to many commodities for near delivery, are more expensive than prices tied to contracts that expire in a few months, a condition known as backwardation. This signals that traders expect markets to become depleted in the near term, which could keep prices high.

One group benefiting from the higher prices: mining and energy companies. Freeport McMoRan Inc.

Shares have soared more than ninefold since their March 2020 low thanks to a surge in copper prices. Meanwhile, Devon Energy Corp.

has jumped more than nine times while Halliburton Co.

and Marathon Oil Corp.

more than sevenfold in the same period.

Certainly, the commodities rally could come to an abrupt end if Russia and Ukraine strike a ceasefire agreement or if the lifting of sanctions on Iran brings more oil to the market. Some analysts also worry that higher prices could cause consumers to back off their habits. An increase in coronavirus cases in China is already dampening demand prospects.

“Commodities are hot right now, but they’re very volatile and it’s hard to know when they’re going to run out of gas,” said Louise Goudy Willmering, partner at investment advisory firm Crewe Advisors.

An unexploded missile was stuck in the ground in a wheat field in Mykolaiv, southern Ukraine, last week.


Photo:

Vincenzo Circosta/Zuma Press

Write to Hardika Singh at hardika.singh@wsj.com

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https://www.wsj.com/articles/commodities-are-poised-for-best-quarter-in-32-years-11648732317?mod=rss_markets_main Commodities end best quarter in 32 years

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