By Myra P. Saefong
Bloomberg Commodity Index climbs to its highest level of the year
Commodities were broadly higher for the week on Friday, with a key index for the market at its highest level of the year, led by a rise in cocoa futures to an all-time high.
Strength in industrial metals such as copper and silver, and energy, particularly oil, also contributed to the sector’s rise this week.
During Friday’s trading, the Bloomberg Commodity Index XX:BCOM, which tracks 24 commodities, was at $99.35, up 1.4% this week, poised for a third straight weekly climb and its highest close year to date, according to Dow Jones Market Data.
“Various factors have caused a perfect storm for many commodities prices in recent days,” said Matthew Sherwood, senior Europe and lead commodities analyst at The Economist Intelligence Unit. “Signs that the Federal Reserve and other major central banks have orchestrated a soft landing for their economies is boosting growth prospects.”
Investors are also betting on interest rates coming down in the near future, even if that is not until the middle of the year,” he told MarketWatch. So “concerns about high-for-longer rates weighing on demand prospects are starting to fade.”
Read: Bullard says February job report increases chance of Fed cutting interest rates sooner
Against that backdrop, there’s also been notable weakness in the U.S. dollar since mid -February, “largely brought on by the dovish policy path” that the Fed has been on since it pivoted in December 2023 and began preparing the market for rate cuts this year, said John Caurso, senior market strategist at RJO Futures.
The ICE U.S. Dollar index DXY on Friday traded at 103.473, on track for a weekly gain of 0.7% but trading 0.7% lower month to date. Weakness in the greenback can provide support for dollar-denominated commodity prices.
Cocoa
Cocoa has led the gains among major traded commodities, with the Bloomberg subindex for cocoa trading at $80.22 in Friday dealings on the ICE Futures U.S. exchange, up 23% this week and headed for a new all-time high, based on data going back to 2014.
Most-active cocoa futures for May delivery (CCK24) (CC00) settled at $8,018 per metric ton Friday on the ICE Futures U.S. exchange – up 25% for the week to a fresh record settlement.
Read last month’s story: Why chocolate lovers will pay more this Valentine’s Day than they have in years
El Niño has caused extremely wet conditions in West Africa, causing fungal disease in cocoa crops, which is hampering the production and harvesting of cocoa beans, said Sherwood. That impact is “particularly pronounced” in Côte d’Ivoire and Ghana, which together account for 60% of global cocoa output, he said.
Port arrivals of cocoa in Côte d’Ivoire were down by 32% between the start of the 2023/2024 crop year, which runs from October to September, and Feb. 18, said Sherwood. Growers in Ghana also warn of “precipitous falls” in cocoa production.
Adverse weather is also affecting other cocoa producers in Africa, including Cameroon and Nigeria, as well as the main Latin American producers – Ecuador and Brazil, he said.
Caruso, meanwhile, pointed out disease and pest damage to cocoa trees last summer as high costs for fertilizers lessened fertilizer use among producers, said Caruso.
Industrial metals
Industrial metals were among standouts in commodities performance this week, with copper and silver notable gainers.
In Friday dealings, the Bloomberg Industrial Metals subindex traded 2.7% higher this week at $143.53.
For the week, prices for most-active May copper (HGK24) (HG00) added 6% on Comex to settle at $4.1245 a pound and May silver (SIK24) (SI00) climbed by 3.4% to settle at $25.381 an ounce.
Copper prices “may have finally turned the corner,” said Caruso. The world experienced a global manufacturing recession last year, and “we are now receiving evidence that we may be coming out of that.”
The copper market was also recently high with news that Chinese copper smelters, which represent nearly 50% of the world’s smelting capacity, agreed to cut smelting production, he said.
Top copper smelters in China agreed Wednesday to cut production at some plants due to a shortage of raw material, Reuters reported, citing two sources close to the matter.
Silver, meanwhile, may be “nearing a perfect storm for higher prices,” as it shares both precious, safe-haven characteristics, as well as industrial qualities, said Caruso.
It’s largely tracked the price of gold higher, but while gold has carved out new all-time highs, silver prices “lag severely on a historical basis,” he said.
Most-active gold futures (GC00) (GCJ24) settled at a record high of $2,188.60 on March 11, but ended the week with a loss of 1.1%.
Read: Here’s why gold, bitcoin and stocks are all hitting new highs
Silver has “long appeared underpriced, especially relative to gold and has not benefited as much in recent years from the price rises seen in other commodities,” Sherwood said. Now “there seems to be a major play going on in terms of betting on silver prices outperforming other commodities.”
Energy
The energy sector also strengthened this week, with gains led by oil and gasoline. The Bloomberg Energy subindex was up 2.1% this week at $31.46.
For the week, U.S. benchmark West Texas Intermediate crude for April delivery (CLJ24) (CL.1) climbed of 3.9% on the New York Mercantile Exchange to end at $81.04 a barrel, while the April contract for reformulated gasoline futures (RBJ24) rose 7.7% to $2.72 a gallon.
Read: Why drone attacks in Russia could drive U.S. gas prices higher
Global benchmark May Brent crude (BRN00) (BRNK24) rose 4% for the week on ICE Futures Europe, finishing at $85.34 a barrel.
Read: Oil prices settle lower, but gain about 4% for the week
The rise in energy prices is tied to the economic growth story, said Sherwood. Markets are finally “cottoning on” to the fact that supplies from the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, will “remain depressed while global demand is heading for another record year.”
Strong output gains in the U.S., which recently marked record-high oil production, have helped the supply situation, but that will still not be enough for what is still a “very tight market,” said Sherwood.
That has essentially helped prices “stabilize” in the $80-a-barrel levels, he said.
Outlook
As for the outlook for the commodities market, following this week’s gains, Caruso said he’s “bullish today, but that could certainly change tomorrow.”
He said his “quantitative and trend indicators” suggest commodities are a “great bet right now, specifically metals – precious and industrial – and if there is a second quarter Chinese recovery to mix in with this theme, then “yes, there’s a great case to made for higher commodity prices.”
On industrial metals, in particular, Sherwood said he believes those will “do well from here on out.”
“Owing to the central role of nickel and copper in the green transition, demand [and prices] will increase strongly from the second half of 2024,” he said. Copper miners are taking a cautious approach to production, which will “restrain the supply response and probably lead to shortages by the end of the decade.”
Sherwood also said that the green transition, particularly booming demand for electric vehicle batteries, will lift demand for critical minerals such as cobalt, graphite, and lithium.
Read archived story: Here’s what the U.S. plan for EV sales means for critical metals such as copper and lithium
For oil, Sherwood expects the global oil market to remain “fairly tight” this year.
“With Saudi Arabia unlikely to increase output markedly in the second half of 2024, and other OPEC members also sticking to voluntary cuts, the market will return to deficit,” with demand exceeding production, which will “limit the downside to oil price forecasts in 2024,” he said.
Also putting a floor under prices will be global oil demand, which is set to reach another record high, “owing to still-strong demand in the developing world,” said Sherwood. Heightened geopolitical risks tied to the Israel-Hamas war still threatens to cause market disruptions, but we expect prices to mostly trade at about $80 for the year, he said.
-Myra P. Saefong
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