Commodities Are Poised for Best Quarter in 32 Years

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Commodities are on track for their best quarter in more than 30 years after Russia’s invasion of Ukraine supercharged a rally in markets from oil to wheat and nickel.

The war has disrupted traffic on goods coming out of the Black Sea, curtailing supply and sparking sharp price swings across financial markets. Nervous investors are weighing the fallout from the conflict along with higher interest rates from the Federal Reserve, which could threaten the economy’s postpandemic recovery.  At the same time, a sharp run-up in commodities prices has some investors and economists worried about inflation jumping even higher from here.

The S&P GSCI, a benchmark tracking the prices of commodities futures from precious metals to livestock, has climbed 34% in the first quarter, on pace for its biggest gain since 1990.

Bloomberg Commodity IndexS&P 500S&P Goldman Sachs Commodity Index


“When the supply and demand situation is tight and then you have another supply shock on top of that, it’s not surprising that prices spike even further,” said Chris Burton, global head of commodities and portfolio manager at Credit Suisse Asset Management.

U.S. crude oil prices have climbed 43% to $107.82 a barrel since the end of last year and rose as high as $123.70 in early March, a level last seen in 2008. That rally propelled gasoline prices to record levels, pinching consumers at the pump.

The ripple effects from higher energy prices have spread to other commodities. Wheat has gained 33% this year to trade at its highest level since 2010, while corn has added 24%. Many metals—aluminum, copper, nickel and palladium—hit new highs as well.

The rally extends last year’s rebound, which was driven by higher consumer demand for goods and services when the economy reopened after the Covid-19 pandemic, coupled with tightening supply due to shipping bottlenecks and bad weather.

The gains stand in contrast to commodities’ performance over the past decade when years of oversupply and low demand had dragged prices down.

Commodity vs. Retail Prices: How Strongly Are They Linked?


Commodity vs. Retail Prices: How Strongly Are They Linked?

Commodity vs. Retail Prices: How Strongly Are They Linked?Play video: Commodity vs. Retail Prices: How Strongly Are They Linked?

Commodity prices are hot right now. But the prices investors are paying in the open market for commodities like coffee, copper or corn can have little to do with the price customers pay at the store. WSJ’s Dion Rabouin explains. Illustration: Adele Morgan

The recent advance may even be attracting some investors who had shunned commodities in previous years.

“They [commodities] probably have some investors taking a second look: ‘Should I be putting commodities back into my portfolio, given elevated inflation levels?’ ” said Karim El Nokali, an investment strategist at Schroders.

Fed officials are closely watching the surge in prices of raw materials as they embark on a campaign to raise interest rates to tame inflation. The central bank increased rates by a quarter-percentage-point at its March meeting, and Fed Chair Jerome Powell has hinted since then at the possibility of more aggressive increases at the coming meetings. That has helped send the yield on the 10-year Treasury note to its highest level in about three years.

U.S. crude oil performanceSource: FactSetAs of March 31, 11:18 a.m. ET

Feb. 2022March015304560%

If the Fed raises rates too quickly, however, analysts caution it could lead to a period of higher inflation alongside lower economic growth—a term known as stagflation that hurt stock market returns in the 1970s.

Commodities are often seen as an attractive hedge against the rising prices of goods and services. Investors have poured money into general commodities’ mutual and exchange-traded funds for 11 consecutive weeks, according to Refinitiv Lipper data through March 23, the longest streak since a 23-week run that ended in June 2021.

In another bullish sign, futures tied to many commodities for delivery soon are more expensive than prices linked to contracts that expire several months from now, a condition known as backwardation. That signals that traders expect markets to be undersupplied in the near future, which could keep prices elevated.

Performance of mining and energy companies, weeklySource: FactSetAs of March 31, 11:28 a.m. ET

2022March-20-1001020304050607080%Halliburton Devon Energy Marathon Petroleum Freeport-McMoRan

S&P 500 Index

One group benefiting from the higher prices: mining and energy companies. Freeport-McMoRan Inc. shares have shot up more than ninefold from their low in March 2020, thanks to an advance in copper prices. Meanwhile, Devon Energy Corp. has jumped more than ninefold, while Halliburton Co. and Marathon Oil Corp. have jumped more than sevenfold over the same period.

To be sure, the commodities rally could come to an abrupt end if Russia and Ukraine reach a cease-fire agreement, or if the removal of sanctions on Iran allows more oil to enter the market. Some analysts also worry that consumers could dial back their habits because of higher prices. Already, an increase in coronavirus cases in China is dampening the demand outlook.

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

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

Photo: Vincenzo Circosta/Zuma Press

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