Source: U.S. Bank Asset Management Group, January 2023

Key takeaways

  • Commodities prices soared in 2021 and 2022 as demand for products and supply disruptions affected the market, before retreating later in 2022.

  • Commodity prices are subject to significant volatility, which occurred in recent times.

  • The outlook for commodity prices going forward is mixed, but there may be ways to position your portfolio to benefit from the current environment.

Inflation became the major economic story beginning in 2021, as we experienced higher-than-average increases in living costs. In news reports about inflation, references are often made to “the volatile food and energy sectors.” Prices in these categories tend to be less predictable than other components of inflation because they’re tied to worldwide commodity market trends. Commodity prices played a major role in inflation’s surge that began in 2021, and also contributed to a pullback from peak inflation levels late in 2022.

Commodities comprise a range of raw materials such as:

  • Energy products including crude oil and natural gas
  • Metals such as gold, silver, copper and platinum
  • Agricultural products including wheat, corn, sugar and coffee

Commodities represent close to 40% of the Consumer Price Index (CPI) calculated by the U.S. Bureau of Labor Statistics. More specifically, energy represents about 7.5% of the index and food close to 14%.1 Commodity prices can add significant volatility to headline CPI numbers. At the same time, expenses like groceries, gas to fuel motor vehicles and home heating and cooling are essential costs facing consumers. Justifiably, commodity prices garner significant attention.

What is the likely direction of commodity prices going forward, and should your portfolio reflect these trends?


The fall, rise and fall of commodity prices

Commodity price trends dating back to 2020 provide a prime example of the volatility that can impact this segment of the economy. For example, crude oil prices closed at $10.17/barrel in April 2020, just as the global economy was in the midst of a virtual shutdown in the early days of the COVID-19 pandemic. That unsustainably low-price level reflected fears of far-reaching economic fallout arising from the pandemic and activity restrictions. However, emergency monetary and fiscal stimulus measures and gradual reopening resulted in an economic rebound. Oil demand steadily rose while supplies remained relatively stagnant. In early June 2022, the price of a barrel of crude oil topped $120. That lofty price level did not hold. By early December, the price of oil dropped more than 41%, to under $72/barrel.2

“Trends in oil prices reflect supply and demand expectations for the global economy.”

Tom Hainlin, senior investment strategist at U.S. Bank Wealth Management

“Trends in oil prices reflect supply and demand expectations for the global economy,” says Tom Hainlin, national investment strategist at U.S. Bank. “The sudden decline later in 2022 demonstrated that many traders, who drive prices on the futures market for commodities, anticipated an economic slowdown in the coming months.”

While the economy slowed in 2022, it has to this point, avoided a recession. Oil prices settled close to the $80/barrel level in early 2023. Other commodities, such as agricultural products and metals, followed a similar trend. “The recent slide demonstrates that markets removed a ‘supply risk premium’ related to Russia’s invasion of Ukraine,” says Rob Haworth, senior investment strategy director at U.S. Bank. “Demand also fell, driven in part by the Federal Reserve’s (Fed’s) significant interest rate hikes that began in March 2022.” The Fed’s actions are designed to slow economic growth to combat the recent inflation surge. As an imbalance between supply and demand drove inflation higher, the Fed hopes to slow demand, primarily from consumers.

The Russia-Ukraine war created a notable surge in prices for agricultural commodities. Both Russia and Ukraine are major exporters of wheat and other farm products. “Investors priced in a premium with the conflict fearing lost supplies,” says Haworth. “In normal times, agricultural prices run on an annual cycle, with prices driven by the quality of the growing season for different crops.” The premium tapered off in the closing months of 2022, and Haworth says factors like the quality of the growing season are once again the primary concern for commodities traders.

Hainlin points out the geopolitical event risks relative to food supplies. “Africa remains heavily reliant on food shipped from Russia and Ukraine. Based on history of other periods when food shortages occurred, there is the potential for unrest if supply shipments are disrupted,” says Hainlin. In the summer of 2022, a backlog of grain stuck in Ukrainian harbors began to move after Russia, Ukraine, Turkey and the United Nations reached an agreement to open shipping lanes on the Black Sea, even as the war continues.

Metals prices dropped recently but experienced some variation in pricing trends compared to energy and agricultural commodities. “China is a major source of demand for metals, and its frequent shutdowns of major cities in pursuit of its ‘zero-COVID-19’ policy slowed demand in recent months,” says Haworth. By early summer, metals prices eased. Haworth attributes this to factors like slower car sales (as supply chain constraints, particularly for semiconductor chips, limited automobile production) and a recent decline in housing market activity. Both automobile production and home construction drive much of the demand for copper.

The short-term decline for commodity prices may hold for some time. “Commodities prices were on the rise for the better part of two years,” says Haworth. “There’s reason to expect prices to moderate a bit, particularly if the U.S. and other parts of the global economy face a slowdown.”


Longer-term supply concerns

Energy demands are likely to hold up over the long term, even with the increased focus on reducing carbon emissions to combat climate change. At the same time, supplies may not change dramatically from where they stand today. “OPEC and others did not put much new investment into infrastructure that could boost production,” says Haworth. “Five-year rolling inventory levels are low, so if demand for oil picks up, prices are likely to rise as well.” Haworth notes that with China’s economy re-opening following the repeal of its “zero-COVID” policy, that could boost global demand.

Hainlin agrees that the current environment differs from what has been a usual trend in the energy industry. “Normally, when prices go up like we saw in recent months, producers expand capacity. Then they reach a point of overcapacity and prices drop,” says Hainlin. “This typically leads to a boom-and-bust cycle. But instead, oil producers demonstrated significant capital discipline.” That may keep production levels down, which could support elevated oil prices.

Metals may be in a less favorable position if industrial demand is driven lower due to an economic slowdown. However, Hainlin notes that if China can resume normal business activity, “that would be a tailwind to industrial metals, such as copper.”


Investor considerations around commodities

Investors may consider including commodities in a portfolio to hedge the impact of higher inflation. Both Hainlin and Haworth say there are limited benefits with commodities investments. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” warns Hainlin.

“The primary challenge in doing so is that historically, it’s a very volatile asset class,” says Haworth. “Investing in commodities often requires that you make two good decisions – to buy at the right time and to sell at the right time.”

Yet there are other approaches that can provide portfolio benefits in certain environments. One effective way to capitalize on today’s commodities market is through investments in infrastructure. This includes companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. “There is strong demand in many of these areas today,” says Hainlin, “but benefitting from owning these investments doesn’t always require that prices move higher. These investments also generate regular income for investors.” Hainlin says companies in infrastructure-related businesses tend to have fixed costs but realize bigger profits in times when inflation drives prices higher.

Investors should be prepared for frequent changes, both higher and lower, in commodity prices. Talk with your financial professional about the opportunities to position your portfolio more effectively to prepare for price movements in the commodities markets.

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  1. U.S. Bureau of Labor Statistics, “Relative importance of different expenditure categories,” December 2021.

  2. Source:, Crude Oil WTI, New York Mercantile Exchange, Front Month price.

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