Weather woes and energy crisis lift commodities

By Ole Hansen, Head of Commodity Strategy at Saxo Bank

The commodity sector continues to recover as the Bloomberg Commodity Index claws back more than half of what it lost during the June to July 20% correction. Gains were seen across most sectors, led by agriculture as weather woes lifted the cost of coffee and the three major crops – especially corn. Industrial metals received a boost from China’s continued efforts to support its weakening economy by announcing more stimulus policies that would pump billions into infrastructure projects. The energy sector was supported by surging gas prices driving up demand for diesel and Saudi Arabia flagging the risk that OPEC+ may cut production to stabilise volatile markets.

In financial markets, the dollar reached a fresh 20-year high against the euro as Europe’s energy crisis continued to pressure the economic outlook for the region. US stocks tumbled and bond yields rose ahead of Friday’s eagerly awaited speech by Federal Reserve Chair Jerome Powell. In which, he was expected to reiterate his determination to bring down inflation by continuing to hike interest rates. Inflation-fighting measures, such as hiking interest rates and removing stimulus into a post-pandemic economic slowdown, was the main driver behind the recent correction in commodities.

Overall, however, we maintain the view that commodities can weather headwinds from an economic slowdown with supply of key commodities being equally challenged. In the long term, support for commodities will be driven by underinvestment, urbanisation, the green transformation and deglobalisation. In the short term, prices are likely to be supported by the unfolding energy crisis in Europe, Russia-sanctions related supply disruptions, adverse weather raising fresh concerns about food supplies, and China’s efforts to support its economy. ​

Natural gas, now the biggest component in the Bloomberg Commodity index

The Bloomberg Commodity index BCOM index together with the S&P GSCI and DBIQ Optimum Yield Diversified Commodity Index belongs to the heavy weights within the global investment industry for commodities. It tracks the performance of 23 major commodity futures targeting a one-third exposure in the main sectors of energy, metals and agriculture. The target weights are set once a year every January and if prices shift significantly during the year, a reweighting will not occur until the following January.

However, an astonishing 160% year-to-date surge in US natural gas futures has more than doubled its weight to 17.2% from 8%, and made it the biggest component in the BCOM index for the first time ever – more than double that of WTI and Brent combined. From a sector perspective, it has helped lift the total energy exposure by 9.2% to 40.9%. All other sectors and sub-sectors have seen reductions with the biggest impacting industrial and precious metals by a combined reduction of 7.5%. These moves away from target weights will not be adjusted until next January. At which point, we may see some major activity as the rebalancing process would see selling of gainers, especially natural gas while the biggest losers will be bought.

To read the full Weekly Commodity Update : click here

Press contact