Commodities on tear. The CRB commodity index is up 52%¹ in the past year (March 2021-March 2022). This makes physical commodities the best performing of all asset classes over this time period. By comparison, listed real estate is +25%², S&P 500 +10%³, US bonds -2%, and Bitcoin -25%. It has been about more than just oil, with most commodity prices surging.
This is rare. Commodities have been depressed for the last decade, and underperformed other assets. The past decade, since March 2012, the S&P 500 is +170% and Bloomberg commodity index -15% (see graph below for 5 year performance). This helped build this rally foundation, with sector investment low. Tight supply, surging post-pandemic physical demand, and inflation-hedge demand, are driving this rally.
Russia fears extended the rally. Fears of Russia supply disruption have boosted the pre-existing commodity rally even further. The country is a major producer of many energy, agricultural, and base metal commodities. With markets already tight, further disruption has an outsize impact.
The major market impact of the Ukraine crisis. Versus its 1998 crisis, the last time Russia disrupted the global economy and markets, its economy and financial linkages are much smaller. But the importance of its energy sector is now larger. This is the key ‘contagion’ channel today.
The oil price has been the centre of attention. Prices approached the prior Brent record high of $148/bbl. from 2008. Further Russian sanctions escalation could drive higher prices. But longer term, these prices could drive lower demand and increased substitution, which may cut oil prices.
It is all about supply. Saudi Arabia-led OPEC and Russia control around 50% of global oil supply. They have been slowly pumping more oil, but this has lagged the demand recovery from the pandemic. Whilst investment in new production has been held back by the ‘green transition’.
Higher oil prices are boosting inflation fears. Inflation is already high, at 7.9% in the US and 5.5% in the UK (March 2022, Refinitiv). Soaring oil and natural gas prices are adding to these fears. But over the long term economies have been becoming less energy intensive. US energy consumption per unit of GDP has fallen over 60% since the 1970’s oil crisis (EIA).
‘Stagflation’ fears rising. High oil could both drive up inflation, and cut economic growth. As we have to spend more on energy we have less for other goods. This is called ‘stagflation’, and was last seen in the 1970’s. But GDP growth rates are high today, and governments could help.
China is important. It is the biggest overall buyer of commodities in the world. It is also the only major central bank in the world cutting interest rates today (cbrates.com), in order to boost its economy. This could further expand commodity demand and help keep prices ‘high-for-longer’.
Stock market impacts. The world’s best performing markets this year have high exposure to commodity stocks, from Brazil to the UK. This is in stark contrast to broader global equities, with the world’s largest economies and markets, from US to China, having minimal exposure.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.