Jonathan Kitchen
This past quarter, gains in the energy sector offset losses from 2023. Looking ahead to the rest of the year, commodities are poised to benefit from Fed easing and continued political conflict.
Energy Sector Fuels Commodities Rebound
The energy sector led all sector gains in Q1 2024 by a wide margin and provided most of the gains for the UBS Constant Maturity Commodity Index (CMCITR), which was up 5.18%. CMCITR outperformed its primary competitor, the Bloomberg Commodity Index (BCOM), by almost 3%.
The continued geopolitical conflicts in Ukraine and the Middle East, along with existing OPEC production cuts, triggered strong energy sector gains. Global demand for oil was also stronger than expected, with the U.S. economy leading the charge. U.S. interest rates and the U.S. dollar rose during the quarter, which are normally a headwind for commodities. Commodities rallied despite the stronger dollar, supply concerns and stronger demand.
Energy’s Gains Reverted 2023’s Losses; Natural Gas Still Struggled
The energy sector gained 10% over the quarter. WTI Crude oil and Brent Crude Oil were both up about 12%; gasoil up by 15%, heating oil up by 12%, and unleaded gasoline up by 18%. In March of this year, Ukraine began an attack on Russian energy infrastructure targets, concentrating on oil refineries. This led to global supply concerns for crude oil refined products, heating oil, gasoil or diesel and gasoline.
U.S. natural gas fell sharply in Q1 2024, declining by 14%. The Biden administration stopped approving new LNG export facilities, which has hurt the longer-term outlook for U.S. natural gas. As a result, those natural gas producers have started to cut back on production, which stabilized prices between $1.50 and $2. CMCITR, by design, has a smaller allocation to U.S. natural gas of 3.7% versus BCOM’s 5.9% exposure. This difference was the largest reason for CMCITR’s outperformance versus the benchmark BCOM in the energy sector.
The agriculture sector was up 2% in the quarter, largely driven by cocoa. London cocoa was up 139% and NY cocoa was up 126% by the end of the quarter. Weather problems led to very poor crops in West Africa, the world’s largest producer of cocoa. CMCITR has exposure to both London cocoa and NY cocoa, while BCOM does not invest in cocoa. Sugar and cotton also had sizeable gains in the quarter. These gains offset losses in corn, soybeans, and wheat. CMCITR’s investment in cocoa contributed to the outperformance versus BCOM in the sector.
The industrial metals sector was up about 1%. Copper led the sector gains, which offset losses in aluminum and zinc. Towards the end of Q1 2024, China’s economic performance showed signs of improvement. Should this trend continue, it could potentially support the demand for industrial metals, as China is still the largest consumer of industrial metals.
The precious metals sector was up 7%, led by gold’s 7.5% gain. Geopolitical tensions supported gold prices despite the higher U.S. interest rates and stronger dollar.
The livestock sector was up 10% due to a strong rally in hog prices, which were up 16.5% during the quarter.
Estimated Roll Yield Contribution Q1 2024
Source: Bloomberg. Data as of March 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
Outlook: Political Conflicts are Still Creating Global Demand for Commodities
Looking ahead to the rest of the year, commodities should benefit from the expected Federal Reserve (Fed) easing later this year. If the Fed begins the easing process, the U.S. dollar and interest rates should fall, triggering stronger global growth and demand for commodities. Additionally, the Russia-Ukraine war looks likely to drag on for a long time, and the Middle East war could expand into wider regional conflict.
Q1 2024 Index Sector Weightings
Source: VanEck, Bloomberg. Data as of March 2024.
Learn more about the VanEck CM Commodity Index Fund (CMCAX) and the VanEck CMCI Commodity Strategy ETF (CMCI), which seek to track, before fees and expenses, the CMCITR.
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The UBS Bloomberg Constant Maturity Commodity Index (CMCITR) is a total return rules-based composite benchmark index diversified across 29 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
Bloomberg Commodity Index (BCOM) provides broad-based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro-economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
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Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
VanEck CM Commodity Index Fund: You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest-rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity-linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
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