Some analysts warn that 2022 will be a difficult year for commodities, with the pandemic’s impact on economic activity set to influence trading after a volatile year marked by a rally in energy that fueled inflation, and a retreat of precious metals prices.
“It will be a more challenging year for commodities in 2022 because global central banks are tightening policy,” says Noel Dixon, a global macro strategist for State Street. “Central banks reacting to supply-driven inflation,” which they cannot control, is “likely to result in a policy mistake that will adversely impact demand,” he says.
Commodities performed well in 2021. The S&P GSCI, a commodity index composed of 24 exchange-traded futures contracts across five physical commodities sectors, is up some 32% as of Dec. 14. Commodities “once again proved their value,” and demand “appears to be growing for almost all commodity markets, while supply is structurally constrained across the board,” says Hakan Kaya, senior portfolio manager at Neuberger Berman.
Leading the rise, the
S&P GSCI Energy
index has gained 47% year to date, but the
S&P GSCI Precious Metals
index is down nearly 7%.
“As global central banks have begun to tighten, it has caused gold to underperform as real yields have increased,” says Dixon. Gold futures traded more than 6% lower this year, while silver has lost 17%.
On Dec. 15, the Federal Reserve said it would phase out its bond-buying stimulus sooner than previously planned, and suggested three interest-rate hikes next year as it moves to fight inflation.
Gold’s performance in 2022 will depend largely on how the Omicron variant affects the global economy and trade, says Geetesh Bhardwaj, director of research at SummerHaven Investment Management. “With inflation remaining stickier than the Fed had hoped, any loss of confidence in growth prospects could be very bullish for gold.”
In the energy market, natural-gas futures lost about 36% in the fourth quarter, but they still should post a yearly rise of 48% on the back of strong liquefied-natural-gas demand from Europe and Asia, curtailed flows from Russia to the European Union, and restrained U.S. production, says Eliot Geller, partner at CoreCommodity Management.
Oil, meanwhile, made a strong comeback from the historic April 2020 drop to negative prices for West Texas Intermediate crude. The U.S. crude benchmark trades 46% higher this year, but demand uncertainty, tied to the spread of Omicron, was a key reason that major oil producers known as OPEC+ kept their December meeting open to make adjustments to oil output.
Dixon said State Street is “neutral” on the price outlook for oil, as the market is dealing with “the juxtaposition of slower growth and lower supply, as shale producers refuse to increase output due to regulation and uncertainty surrounding demand.” Still, there is upside risk for prices if these supply constraints from shale producers combine with Covid-driven energy demand and limited OPEC+ spare crude capacity, which, he says, is probably less than market estimates.
The natural-gas market is expected to remain tight, and prices are likely to move up next year, says Dixon. The euro zone, which suffered from an energy crisis this year, is set to drive price moves in 2022 “as the major suppliers are still at capacity,” he says.
Looking ahead for commodities in general, the “real risk” for the asset class will be demand, says Neuberger Berman’s Kaya. Fed tapering of asset purchases and rising interest rates are not likely to significantly “make us drive, eat, or consume less,” he says, and another mutation of Covid-19, “with more transmission and hospitalization rates, may not kill demand, but certainly has the potential to delay it.”