Commodities Back on Track in 2024

CMCITR’s Roll Methodology Helped Temper Commodity Losses

Commodity index products were down in general for 2023. However, the UBS Constant Maturity Commodity Index (CMCITR) outperformed its primary competitor, the Bloomberg Commodity Index (BCOM) by a wide margin. CMCITR returned -1.41% while BCOM returned -7.91%, as of 12/31/23. CMCITR’s roll methodology, monthly rebalancing, and commodity weightings all contributed to the outperformance in 2023.

Two important things offset the overall decline in commodities last year: continued positive roll yield and positive returns on collateral. CMCITR continues to invest collateral in 3- and 6-month Treasury Bills, which yielded over 5% for most of the year. CMCITR’s constant maturity roll methodology generated slightly positive roll yields, while BCOM had slightly negative roll yields.

Most of the roll outperformance came from the energy sector. The WTI crude oil and Brent crude oil forward curves were upward-sloping (Contango) in the first 3 months and downward-sloping (Backwardation) from 3 months to 3 years. CMCITR’s curve positioning from 3 months out to 3 years generated positive roll yield while BCOM lost money rolling its front-month crude oil position. Positioning in the energy sector also helped relative performance vs BCOM. CMCITR uses commodity consumption in its weighting methodology which results in a smaller U.S. natural gas allocation. U.S. natural gas fell sharply last year, declining by over 50%.

Commodity weightings also helped CMCITR’s outperformance in the agriculture sector. Cocoa and sugar were the best performers in the agriculture sector; London cocoa was up over 100%, U.S. cocoa was up 70%, and sugar was up 30%. BCOM was not invested in cocoa and had a smaller investment in sugar. Finally, CMCITR’s monthly rebalancing reduced overall volatility.

Precious Metals and Agriculture Rallied; All Others Struggled

The precious metals sector was the best-performing sector, rising an estimated 11% for the year due to strong gains in gold. Most of the gains came late in the year when interest rates declined as the Federal Reserve’s (Fed) signaled the end of the tightening cycle. The U.S. dollar also declined on the Fed’s signal late in the year, which coupled with falling interest rates, helped gold finish the year up 13%. Rising geopolitical tensions following the October 7th Hamas attack on Israel also helped gold rally as a safety asset in the 4th quarter.

The agriculture sector posted an estimated 2.5% return led by gains in cocoa, sugar, and coffee. However, the sizeable gains in these commodities were offset by a large decline in corn (-19%) and wheat (-24%). A better-than-expected crop in Brazil caused the decline in corn prices.

The energy sector fell an estimated 5.7%, led by a 50% decline in U.S. natural gas prices. The demand for natural gas was reduced due to the mild winter and summer weather which was concurrent to the increase in U.S. production. Starting in 2025, the U.S. is expected to have more LNG (liquid natural gas) export capacity, which should help offset the continued strong U.S. production. CMCITR’s smaller allocation to natural gas was the biggest factor in its outperformance versus BCOM; CMCITR’s allocation was 3.5% while BCOM’s was 8.5%.

CMCITR had a small gain in both WTI and Brent crude oil despite declines in both commodities. The U.S. surprised the market by producing more than 1 million barrels of crude oil per day than estimated in early 2023. The stronger-than-expected production came from U.S. shale oil in Texas, some of which was due to completing drilled but uncompleted oil wells, known as DUCs. The inventory of DUCs has fallen sharply so U.S. shale oil production is less likely to surprise on the upside this year. The positive roll yield offset small declines in both crude oil positions.

The industrial metals sector declined by an estimated 4%, led by a 44% drop in nickel prices. China’s disappointing economic growth was the main reason for the decline in industrial metals prices. Copper prices rallied late in the year to finish up 7%. However, the future of the global supply of copper seems uncertain and may not meet the expected growing demand over the next few years. Panama’s closure of a very large copper mine due to environmental concerns adds to the potential future supply constraints. Overall, supply disruptions and security are becoming a major concern in the industrial metals sector.

The livestock sector declined by 8% due to a sharp decline of 27% in lean hog prices. Cattle prices remained strong, gaining 6% on the year.

Outlook: Political Conflicts are Paving the Way for Higher Global Commodity Demand

The longer-term bull market in commodities could resume in 2024. Supply will continue to be challenging as the world transitions away from traditional energy to more renewable sources of energy. Global geopolitical conflict is slowing the transition and increasing both supply and resource security risks. As we enter 2024, global shipping is being disrupted by conflict in the Red Sea and reduced capacity through the Panama Canal. Both shipping bottlenecks are causing delays due to longer shipping routes and causing higher fuel consumption. Both the Russian-Ukraine and Israel-Hamas conflicts are continuing and could escalate. Additionally, if the Fed starts another easing cycle the U.S. dollar is likely to decline and global growth outside the U.S. could reaccelerate, leading to higher global commodity demand. Commodity index products are true portfolio diversifiers and a hedge against global conflict and inflation.

Estimated Roll Yield Contribution 2023

Source: Bloomberg. Data as of December 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.

2023 Index Sector Weightings

Source: VanEck, Bloomberg. Data as of December 2023.