Key takeaways

  • Recent trends illustrate the volatile nature of commodities.

  • Prices of energy and agricultural commodities rebounded in the middle of 2023 following a period of steady decline.

  • Whether directly invested in commodities or not, many investors monitor commodity prices for trends impacting the broader capital markets.

Although inflation moderated considerably during the first half of 2023, prices of some key commodities such as energy and agricultural products began to move higher in July. Commodity prices played a major role in inflation's surge starting in 2021, and also contributed to a pullback from peak inflation levels since mid-2022. Recent upward price trends indicate commodities’ volatile and somewhat unpredictable nature.

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.

While commodity price increases were sizable over the course of 2021 and 2022, prices began to moderate in the second half of last year. The latest reading, as reported in CPI data releases, shows that over the 12-month period (ending in June), commodity prices as a group declined 1.2%. This is a dramatic change from a year earlier, when commodity prices were up as much as 14% year-over-year.2

Chart depicts commodities price changes as a percentage from January 2021 – June 2023.
Source: U.S. Bureau of Labor Statistics

What is the likely direction of commodity prices going forward, and how should investors consider positioning their portfolios to reflect these trends?


Oil prices drop significantly, then begin to recover

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. Since late 2022, however, the price of oil mostly traded in a range of $70 to $80/barrel.3

“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.”

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

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

After topping $80/barrel in April 2023, oil prices fell to $70/barrel, and then generally hovered near that range until early July. By late July, oil prices approached $80/barrel.3 According to Rob Haworth, senior investment strategy director at U.S. Bank, the recent upward trend in oil prices was predictable. “The U.S. government has been tapping its Strategic Petroleum Reserve to boost domestic oil supplies. That process stopped at the end of June.” At the same time, notes Haworth, production cuts began to take effect. “Saudi Arabia and Russia started to cut output in an effort to limit supply and push prices higher.” The question going forward, according to Haworth, is whether forecasters who anticipate a slowdown in the U.S. economy are correct. “If the economy slows, energy demand could fall further, but if the economy picks up, demand could as well, which could push oil prices higher,” says Haworth.

Energy demand will likely 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 compared to 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.”

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 after the start of the Russia-Ukraine war, 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 over time.


Other commodity prices rise

While oil prices dropped in the first half of 2023, other commodities, such as agricultural products and metals gained in price. ‘The Russia-Ukraine war and potential interruptions of grain deliveries add a degree of uncertainty to the agricultural commodities market” says Haworth. Both countries are major agricultural providers. “Recent tensions in the war that may trigger more delivery interruptions for Ukrainian wheat appear to have pushed wheat prices higher,” says Haworth. Most notably, Russia pulled out of an agreement that allowed Ukrainian wheat to be shipped across the Black Sea. Russia also bombed some Ukrainian grain ports. While instability in that region contributes to grain price volatility, weather will ultimately be the biggest factor affecting prices for agricultural commodities, according to Haworth. “Wheat, corn and soybean prices rose in mid-summer 2023, but not above previous high levels.”

Metals prices can be considered in two categories – precious metals such as gold and silver, and industrial metals used in manufacturing, such as nickel and copper for electric vehicle batteries. “Gold prices rose into May, then retreated a bit,” says Haworth. “Gold is often viewed as an inflation hedge, but with inflation scaling back (from a peak of 9.1.% for the 12 months ended June 2022 to 3.0% for the one-year period ending June 20234), interest in owning gold may be waning.”

As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. “At the same time, the surprising turn toward slower growth in China in recent months may dampen demand for industrial metals,” according to Haworth.


Investor considerations around commodities

Investors sometimes 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 opportunities to position your portfolio to capitalize on market trends stemming from the commodities trade.

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

  2. U.S. Bureau of Labor Statistics, “Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, special aggregate indexes.

  3., “Tracking Bond Benchmarks” Dec. 30, 2023.

  4. U.S. Bureau of Labor Statistics, “Consumer Price Index Summary, July 2023,” August 10, 2023.

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