Increased Demand Fuels Commodities Rally

Energy Sector Fuels Commodities Rebound

The energy sector led all sector gains in Q1 2024 by a wide margin and provided most of the gains for the UBS Constant Maturity Commodity Index (CMCITR), which was up 5.18%. CMCITR outperformed its primary competitor, the Bloomberg Commodity Index (BCOM), by almost 3%.

The continued geopolitical conflicts in Ukraine and the Middle East, along with existing OPEC production cuts, triggered strong energy sector gains. Global demand for oil was also stronger than expected, with the U.S. economy leading the charge. U.S. interest rates and the U.S. dollar rose during the quarter, which are normally a headwind for commodities. Commodities rallied despite the stronger dollar, supply concerns and stronger demand.

Energy’s Gains Reverted 2023’s Losses; Natural Gas Still Struggled

The energy sector gained 10% over the quarter. WTI Crude oil and Brent Crude oil were both up about 12%; gasoil up by 15%, heating oil up by 12%, and unleaded gasoline up by 18%. In March of this year, Ukraine began an attack on Russian energy infrastructure targets, concentrating on oil refineries. This led to global supply concerns for crude oil refined products, heating oil, gasoil or diesel and gasoline.

U.S. natural gas fell sharply in Q1 2024, declining by 14%. The Biden administration stopped approving new LNG export facilities, which has hurt the longer-term outlook for U.S. natural gas. As a result, those natural gas producers have started to cut back on production, which stabilized prices between $1.50 and $2. CMCITR, by design, has a smaller allocation to U.S. natural gas of 3.7% versus BCOM’s 5.9% exposure. This difference was the largest reason for CMCITR’s outperformance versus the benchmark BCOM in the energy sector.

The agriculture sector was up 2% in the quarter, largely driven by cocoa. London cocoa was up 139% and NY cocoa was up 126% by the end of the quarter. Weather problems led to very poor crops in West Africa, the world’s largest producer of cocoa. CMCITR has exposure to both London cocoa and NY cocoa, while BCOM does not invest in cocoa. Sugar and cotton also had sizeable gains in the quarter. These gains offset losses in corn, soybeans, and wheat. CMCITR’s investment in cocoa contributed to the outperformance versus BCOM in the sector.

The industrial metals sector was up about 1%. Copper led the sector gains, which offset losses in aluminum and zinc. Towards the end of Q1 2024, China’s economic performance showed signs of improvement. Should this trend continue, it could potentially support the demand for industrial metals, as China is still the largest consumer of industrial metals.

The precious metals sector was up 7%, led by gold’s 7.5% gain. Geopolitical tensions supported gold prices despite the higher U.S. interest rates and stronger dollar.

The livestock sector was up 10% due to a strong rally in hog prices, which were up 16.5% during the quarter.

Estimated Roll Yield Contribution Q1 2024

Source: Bloomberg. Data as of March 2024. 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.

Outlook: Political Conflicts are Still Creating Global Demand for Commodities

Looking ahead to the rest of the year, commodities should benefit from the expected Federal Reserve (Fed) easing later this year. If the Fed begins the easing process, the U.S. dollar and interest rates should fall, triggering stronger global growth and demand for commodities. Additionally, the Russia-Ukraine war looks likely to drag on for a long time, and the Middle East war could expand into wider regional conflict.

Q1 2024 Index Sector Weightings

Source: VanEck, Bloomberg. Data as of March 2024.