High inflation, the persisting Russia-Ukraine war and global supply constraints continue to drive commodity prices higher.
Macro Outlook: Supply Constraints Support Commodity Prices
Commodity indices were up modestly during the month of May, as they continue to hold on to and build on the strong gains this year. The combination of high and rising global inflation and the Russia-Ukraine war has been driving commodities higher. Supply constraints, particularly in the energy and agricultural sectors, are likely to persist for the rest of this year and into 2023. The global economy is starting to slow as Central Banks raise interest rates, and high and rising prices hurt demand. Furthermore, supply constraints will likely outweigh the demand destruction from slower growth.
China’s economy has been slowing throughout the year due to the strict COVID lockdown policies. This is likely to change in the second half of 2022 as they open up the country from lockdowns and stimulate the economy with easier monetary policies and expansionary fiscal policies. This should offset the slowdown in the rest of the global economy.
The bottom line is that western Central Banks will have a difficult time controlling inflation. Continued supply constraints from the Russia-Ukraine war and a resurgence in China’s economy will most likely support commodity prices for the rest of this year and into next year.
Index & Sector Review: Energy & Industrial Metals
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) underperformed the Bloomberg Commodity Index (BCOM) in May by 0.40% and almost 7% year-to-date. Almost all of BCOM’s outperformance came from the energy sector and individual commodity weightings. This is due to slightly higher allocation in energy, specifically natural gas. Natural gas has been the strongest commodity in the energy sector this year due to the Russia-Ukraine war.
CMCI has a higher exposure to industrial metals, which were only up modestly this year due to slower Chinese economic growth. This difference in exposure has hurt CMCI relative to BCOM in the short run, but we believe it will benefit CMCI in the long term. Furthermore, we believe that industrial metals will outperform other sectors over the longer term because of the ongoing energy transition to renewable sources of energy. Renewable energy technologies require large amounts of industrial metals like copper and nickel. Meeting the rising demand for industrial metals will be a challenge.
Index Sector Weightings
CMCI continues to outperform BCOM in roll yield. CMCI has outperformed BCOM by almost 6% since the start of the commodities cycle (5/31/20 – 5/31/22). During the month of May, CMCI gained almost 1.0% and all gains came from the energy sector. Within the energy sector, gasoline led gains due to a shortage of refining capacity, rising 12% for the month.
CMCI Outperformance Since the Start of the Commodities Cycle
The outlook for commodity investments continues to look positive due to global supply constraints.
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