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Commodity prices have pulled back recently. They look like they’re just taking a pause—and are likely to resume rising soon.
The
Bloomberg Commodity Index
(BCOM), home to oil, gas, industrial metals such as copper and aluminum, and grains such as soybeans and wheat, fell as much as 9% from a multiyear high of $132.63 hit on March 8. Driving the drawdown has been optimism that a peace deal between Russia and Ukraine could be reached soon, which would reduce the likelihood of more restrictions on Russian commodities, freeing up the global supply.
The commodity index is up about 25% so far this year, but the recent swoon is probably an attractive buying opportunity.
That’s partly because the pullback from this year’s gain in commodities looks like more of a pause from the gains that happened too quickly, not because the outlook for commodity prices is truly dimming. For the year through Feb. 25, the index gained 13%. Then, it gained just over that in only a few weeks when it reached its early March high. So the brief decline this week makes sense, wrote John Roque, market technician at 22VResearch.
The idea that prices can keep gaining makes sense, considering recent global developments. The Russia situation isn’t exactly going away soon, as Russia hasn’t made any concrete decisions to capitulate to western countries’ wishes for peace. That indicates that western countries could still be compelled to shy away from buying Russian commodities.
“Positive sound bites emerged about the ongoing talks between Russia and Ukraine; however, we continue to warn that Moscow should be judged on its actions not words,” wrote Helima Croft, global head of commodity strategy at RBC. “We would add that Russia is likely to remain the world’s most sanctioned country for the foreseeable future,” Croft said, adding that the firm’s outlook for oil is still bullish.
Already, buyers have already begun to re-emerge to close the week, sending commodity prices higher. The Bloomberg Commodity Index is up to around $123 from a $120 low point of the recent dip earlier this week. Buyers have stepped in before at these prices; in early March the index surged from that level after a day of essentially no movement.
“A consolidation for commodities…would act as a staging ground for the next upside push,” Roque wrote. The declines in commodity prices “are good buying opportunities,” he added.
Over the long term, the Russia situation feels like anybody’s guess. But for the near term, commodities could keep gaining.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
