Steady Climb for Commodities
This past year has been particularly strong for the commodities market. Our preferred commodities barometer, the Bloomberg Commodity Index, has risen +24.1% thus far in 2021. The rise, as depicted in the chart below, has been steady throughout the year. The only notable pullback occurred during the last two weeks, where the index declined by -7.5% between Thanksgiving and December 3rd. The Bloomberg Commodity index seemed to find a base and recovered +1.1% this past week.
Bloomberg Commodity Index – Year to Date
Source: Bloomberg
Commodities have benefited this year from a global supply-demand imbalance as consumption has been much greater than expected, while supply chain constraints have limited the availability of materials. Should the Bloomberg Commodity index hold its level through year end, it will mark the strongest year for the index since 2002.
What has been interesting about commodities in 2021 is the diversity of leadership throughout the year. Early in the year, we saw astounding increases in the price of many industrial commodities such as lumber, silver and iron ore. Prices for these commodities generally peaked around mid-May. Lumber is of interest as its price was cut in half between May and mid-July. However, its price has surged once again lifting 68% since mid-November. Flooding in western Canada has constrained supply leading to these sizable gains.
Lumber – Year to Date
Source: Bloomberg
While industrial materials were falling, energy commodities were just getting started. The price of natural gas held steady during the spring hovering around $3 per million BTUs. Prices climbed throughout the summer and then accelerated into the fall eclipsing $6 in October. As concerns around supply have eased, pricing is now back down to $4 per million BTUs. Alternatively, crude oil has had a rise throughout the year, aside from the most recent Omicrom induced fall, when prices went from over $80/barrel to as low as $65/barrel in early December.
Although there has been wild fluctuation among individual commodities, results in 2021 have been unusually smooth at the broader asset class level. As specific commodities have fallen off, others have risen leading toward a more consistent return pattern. Given that commodities are a more volatile asset class, this level of consistency has been a welcome surprise. Often specific commodities, namely oil, can be a dominant driver of returns or volatility in a given year.
Looking more broadly, the Bloomberg Commodity Index’s return of 24.1% thus far in 2021 is an outlier for the asset class, which over the past 20 years has averaged a 0.50% annual return. However, putting the current level of the index in context of this longer term time period (evidenced in the chart below), you can see commodity prices remain well below where they were has been prior to the Great Financial Crisis. Prices are also not that far above where the Bloomberg Commodity Index sat prior to the pandemic. Time will tell on how commodity prices evolve, but 2021 has been unique given the broad participation amongst most commodities and the wild swings that transpired under the surface.
Bloomberg Commodity Index - Trailing 20-year Price Chart
Source: Bloomberg
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The Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
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