Key takeaways
Commodity prices have been relatively flat overall since late 2023.
However, prices of some key commodities such as oil and copper are trending higher in 2024.
Global economic growth trends often play a significant role influencing commodities markets.
The leveling off of commodity prices in the past two years has contributed to inflation’s easing. Commodities represent more than one-third of the Consumer Price Index (CPI), considered a primary inflation measure. In the one-year period ending in June 2024, commodity prices as measured by its role within CPI declined 0.4%.1
Commodities represent a wide range of assets, including everything from energy and agricultural products to precious and industrial metals. Prices of different commodities can vary, though all tend to be affected by factors such as production levels (supply) and consumer and business demand. Economic factors also tend to come into play. For instance, during global economic recessions, energy demand tends to subside, often driving prices lower.
“Global demand today may be waning,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Even though supplies of many commodities are relatively tight, there are near-term questions about how strong demand will be in a slow growing global economy.”
Consumers are directly affected by commodity prices for essential needs, which impact expenses like groceries, gas to fuel motor vehicles and home heating and cooling. These are the precise categories of the Consumer Price Index that tend to be de-emphasized by the Federal Reserve (Fed), which sets monetary policy in an effort to maintain moderate inflation. Yet food and energy costs represent major expenditures for consumers and businesses, and remain major contributors to household inflation.
“In early 2024, food and energy prices rebounded, temporarily raising inflation risks,” says Haworth. “But in recent months, prices leveled off, contributing to a modest downturn in the overall inflation rate.” Food prices, as measured by the Consumer Price Index, have barely risen in the past three months. Energy costs declined in May and June.
What is the likely direction of commodity prices going forward, and how might investors consider positioning their portfolios to reflect these trends?
Energy prices are among the most visible of commodities, a category subject to significant volatility, often driven by world events. Crude oil prices closed just above $10/barrel in April 2020 as the onset of the COVID-19 pandemic caused a global economic virtual shutdown. Shortly after Russia invaded Ukraine two years later, the price of a barrel of crude skyrocketed to $120, partially reflecting concerns about the availability of oil from Russia, one of the world’s top producers. Yet supplies expanded quickly, and from late 2022 until August 2023, the price of oil mostly traded in a range of $70 to $80/barrel. It briefly jumped to more than $90/barrel in September 2023 before retreating. Oil prices again moved higher in 2024, topping $80/barrel by mid-March and remaining at that level through April before again dropping below $80/barrel in May.2
Haworth says demand for oil remains relatively constant. The supply side was temporarily stressed as a number of countries associated with the OPEC+ oil cartel extended voluntary production cuts through 2024’s second quarter as a way to keep prices elevated. “The market seems to have adjusted to OPEC’s reduced production levels,” says Haworth. “In the meantime, domestic inventories are rising, which relieves some price pressure.” Events in the oil-rich Middle East bear watching as they could have an impact on supplies. In the wake of the Israeli-Hamas conflict, tensions between Israel and Iran briefly surfaced in April, but then faded.
“The market seems to have adjusted to OPEC’s reduced production levels,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “In the meantime, domestic inventories are rising, which relieves some price pressure.”
Just as the Russia-Ukraine war temporarily created an oil price shock, the war also played a role in higher food prices. “The Russia-Ukraine war and potential interruptions of grain deliveries from those two agricultural-exporting countries added a degree of uncertainty to the grain commodities market as well,” says Haworth. Yet he believes that, as is usually the case, weather remains the biggest factor affecting prices for agricultural commodities. Food prices have eased from earlier highs. Wheat, corn and soybean prices have declined in value on futures markets over the course of 2024 (though mid-July).3 For the 12 months ending in June 2024, food costs, as measured by CPI, were just 2.2% higher than a year earlier, slightly below the overall 3.0% inflation reading.1
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 dropped to a low of $1,831/ounce in October 2023, but rose more than 30% by mid-April 2024, to $2,430/ounce. Prices have settled slightly under the $2,400 level since.4
As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. Minerals such as cobalt and nickel are key components for electric vehicle batteries.
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. Inflation’s persistence, mostly staying above the 3% level since June 2024,1 added to commodities’ attractiveness. “With inflation a little sticky, we think allocating a portion of a portfolio to inflation-sensitive assets makes sense for a diversified investor,” says Tom Hainlin, national investment strategist at U.S. Bank. “We like exposure across the commodities landscape, including precious metals, industrial metals and agriculture.”
Infrastructure investments also offer opportunities. Options include 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 Haworth, “but benefitting from owning these investments doesn’t always require that prices move higher. These investments also generate regular income for investors.” Haworth says companies in infrastructure-related businesses tend to have fixed costs but realize bigger profits in times when inflation drives prices higher.
Haworth says commodities sometimes are more effective as a tactical position in a portfolio. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns. “However, commodities historically offer positive returns in environments of elevated inflation, as we are seeing now.”
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.
Commodity prices, such as crude oil and agriculture products, rose in 2021 and for part of 2022, partly due to supplies failing to keep pace with growing demand. Rising commodity prices contributed to increased inflation during that period. Through most of 2023, commodity prices in general moderated, declining significantly from previous highs. This reflected improved supply and lagging demand, particularly for specific products such as oil and natural gas. Through April 2024, oil prices moved higher, but leveled off again in May, according to the U.S. Energy Information Agency.
Typically, changes in commodity prices can drive inflation trends. According to the U.S. Bureau of Labor Statistics, commodities make up close to 36% of the Consumer Price Index, the most commonly watched inflation measure. When inflation began to surge in 2021 and 2022, higher commodity prices, such as for food and gasoline, played a big role. When inflation numbers improved after peaking in mid-2022, declining energy prices and slowing food costs also played an important role.
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. But it can be difficult to earn a durable return with direct investments in commodities or commodity futures. Investors must be aware that commodities tend to be a volatile asset class, and it is difficult to choose the right time to invest when prices can shift significantly in a short period of time. 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. Along with capital appreciation potential, these investments also tend to provide a regular income stream.
With the Federal Reserve maintaining higher interest rates for longer to get inflation under control, what opportunities does this create for bond investors?
When will the Federal Reserve start cutting interest rates?
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