Where Are Commodities Prices Headed?
China’s economy, war in the Middle East and a predicted El Niño are among the factors experts are looking at
Individuals investing in commodities haven’t had a smooth ride over the past few years.
U.S. crude-oil futures briefly turned negative during the height of the pandemic in 2020 before rebounding to more than $82 a barrel recently. World food prices reached their highest level on record last year, in part as the Russia-Ukraine war spooked markets, but have fallen back more recently. And commodities from lumber to copper rode high and then fell, as global inflationary pressures and recession concerns drove trading.
So what happens next?
We asked experts what to expect over the next six to nine months. Here is what they said.
Agriculture
Russia’s invasion of Ukraine last year sent the price of key grains soaring as investors worried that supplies from the two countries—which before the recent war supplied roughly 30% of wheat exports—would be interrupted.
Wheat hit a record price of $12.25 a bushel in the aftermath of the February 2022 invasion, though the price has subsequently fallen, recently fetching $5.61, according to FactSet data. Corn also jumped during the early months of the war to $8.18 a bushel, close to the record of $8.31 in 2012. It recently traded at $4.75. Prices have fallen back amid recession concerns and because war-related supply problems haven’t been as bad as expected.
But some strategists predict the downturn could end soon because prices are nearing the production break-even, or the level at which the cost of production equals the revenue for a product. That means if prices fall further, producers will lose money.
“I don’t know how much more they can drop, given energy prices rising,” says Jake Hanley, a senior portfolio strategist at Vermont-based Teucrium, a provider of agricultural exchange-traded funds. Diesel fuel, for instance, is a key cost for farmers in the U.S. and abroad, and it puts a floor under prices unless energy prices retreat.
Hanley says the war in Ukraine could still lead to supply disruptions and higher prices in the grain sector. Currently, both sides are letting grain shipments pass through the Black Sea without hindrance, though that could change. “The worst-case scenario is no grain leaving the Black Sea,” he says.
Another factor that could raise agricultural prices, Hanley says, is the expected return of the warm, damp Pacific Ocean weather system known as El Niño. Because it tends to disrupt normal weather patterns, El Niño could lead to smaller harvests in different parts of the world. “The risk to these prices is more substantial to the upside,” Hanley says.
What’s more, forecasters predict a Modoki El Niño—a type of El Niño event where the warming occurs in the central equatorial Pacific region instead of the eastern equatorial region. In 2015, a Modoki El Niño event cut corn production in Brazil—the world’s third-largest corn producer—by about one-fifth as drier-than-usual weather hit a key growing area. Shawn Hackett, president of Hackett Financial Advisors in Boca Raton, Fla., says the Modoki El Niño system is likely to change the weather patterns in Brazil again, which could affect corn and soybean production.
Individuals seeking to profit from potential gains in commodities might be better off investing in specialized ETFs rather than futures contracts, Hackett says.
“Futures contracts are highly risky for individual investors,” he says, partly because they tend to be for vast volumes of each commodity. For instance, wheat futures contracts are traded in 5,000 bushel units, which would mean a minimum contract size of $28,050 based on the recent price.
By contrast, ETF investments can be small, large or anywhere in between, depending on the requirements of the investor.
Crude oil
Anyone with a gasoline-powered car or truck knows that oil prices have risen. A barrel of U.S. benchmark crude oil recently cost $82, up from $67 in March. But prices could easily go higher, analysts say.
Part of the recent increase is due to voluntary production cuts from both Saudi Arabia and Russia, two of the largest oil producers. “Those cuts are putting a lot of wind in the sails of the oil market,” says Stewart Glickman, an energy-stock analyst at New York financial-research company CFRA.
Another upside risk: If the recent conflict between Israel and Hamas spreads into the wider Middle East region, it could disrupt oil supplies and drive up prices. Even fear of that happening could do the same thing.
In addition, global demand for oil looks set to stay stable or grow in the immediate future. “American fuel consumption isn’t likely to change even if there is a delayed recession, as employment is high,” says Peter McNally, global head of sector analysts at London investment researcher Third Bridge. High employment means people will be driving to work.
An increase in electric-powered vehicles and hybrid cars might make a small difference in terms of reducing oil consumption, but such vehicles are still a fraction of the overall cars on the road globally—around 2%, according to data from Australia-based PD Insurance and the International Energy Agency. “It’s going to take a while before EVs or hybrids materially crimp oil consumption,” Glickman says.
China, which has struggled economically in recent quarters, presents another possible demand driver, according to Glickman. Expectations for China’s potential growth trajectory are so low, even a mildly better-than-expected increase in energy demand from that country could lift oil prices, he says.
Glickman sees crude prices averaging between $95 and $100 in the near future.
Mined resources
China also has been the driving force behind much of the demand for industrial metals such as copper, aluminum, lithium, steel, nickel and zinc over the past two decades, so the recent weakness in China’s economy explains why prices for these metals have slumped lately. Such metals are used in manufacturing, notably automobiles, as well as in construction.
Copper, for example, recently fetched $3.66 a pound, down from $4.27 in late January as Chinese demand fell.
Should China’s economy show signs of a rebound, industrial-metals prices likely would move higher, experts say. A rebound would depend largely on the government providing an economic stimulus, says Rob Haworth, senior investment strategy director at U.S. Bank’s asset-management group in Seattle.
There is another reason to expect an increase in industrial-metals prices, though: The electric-vehicle revolution will need lots of materials. An electric-car battery, for example, uses up to four times as much copper as a gasoline-powered vehicle. More broadly, the route to clean energy requires vast quantities of mined materials.