It's been a wild year for commodities like oil, gold, copper, lumber, and wheat. Back in February, the opening salvo of the war in Ukraine sent commodity markets into turmoil. Commodity prices skyrocketed, with some hitting all-time highs. By spring and early summer, commodity price increases really hurt many consumers—particularly oil prices, which peaked in the US in mid-June. For example, the average nationwide US gas price hit $5.02 a gallon for regular unleaded on June 14, 2022, with even higher prices striking Europe. The US national average has since dropped to $3.92 per gallon, as of mid October.
Commodity prices had already been on the rise before Russia invaded Ukraine, as global supply disruptions and COVID broadly impacted markets. The chart below of the S&P Goldman Sachs Commodity Index, which reflects the price of more than 24 commodities, shows how wild a ride it has been for commodity prices thus far this year (see Commodity prices surge, fall chart below).
In addition to supply chain problems, commodity market watchers now have to also monitor concerns about a global slowdown and the potential impact of strong currency price moves.
Here's a closer look at some key commodity markets and what the broader impact may be.
Oil, gas prices fall, but energy still looms large
Before Russia invaded Ukraine in late February, crude oil was trading in the $90 per barrel range. It shot well above $120 per barrel by March, and gas prices followed suit throughout the spring and summer. But since the near-term peak in June, oil prices have fallen below levels prewar in Ukraine (see Oil prices surge, fall chart below).
Despite the decline in oil prices, energy markets continue to loom large over the global economy and financial markets. Even with energy prices having dropped substantially from summer inflation shock levels, relatively higher gas prices compared to previous years, along with the approaching cold seasons for the northern hemisphere, could lead to further volatility across markets. Additionally, OPEC+ announced plans last week to cut oil production by 2 million barrels per day to support prices, contributing to market volatility.
Fidelity's latest business cycle update notes the acuity of Europe's situation in particular (Russia produced about 37% of Europe's natural gas supply last year), where the region is "exposed to fallout from the war in Ukraine, including higher natural gas prices, and these economies are experiencing high risk of recession." It's clear that oil prices remain a key factor for investors to watch.
It's been a slightly different story for precious metals like gold and silver this year, but their price patterns netted a mostly similar result to oil. New York gold prices, for instance, surged near $2,040 per troy ounce in the immediate aftermath of Russia's invasion of Ukraine. Since then, gold has trended lower, and is now trading near $1,700 per troy ounce (see Gold falls to multiyear lows chart below).
Gold's decline over the past 7 months has been due to a variety of factors, including a strengthening dollar as US interest rates have risen (the dollar tends to increase in value as US interest rates increase, and it tends to decrease in value when US interest rates decrease). For example, the dollar has strengthened so much against the British pound that it is approaching parity for the first time ever.
The Hightower Report's* September 26, 2022, weekly metals market outlook (which you can find on Fidelity.com in the markets & sectors research page) notes that, even though "the gold market initially held up in the face of [the latest] US interest-rate hike and a significant surge in the US dollar, it [weakened again with] the broad-based commodity market meltdown." This, coupled with "slower gold shipments into China" has made for a gold market that is "under ongoing pressure from inside and outside market forces" over the near term. With that said, the long-term trend for gold prices has been a mostly upward trajectory—with many gold bulls believing it is an effective hedge against inflation over time.
Other metals have experienced huge price swings this year as well, due in large part to the war in Ukraine. For example, nickel (a key input for products like stainless steel appliances and electric vehicles) and palladium (used mostly for jewelry and catalytic converters in cars) have experienced some of the most volatile price action. Russia produced about 9% of the world's total nickel production last year and it accounts for 40% of the world's palladium. Both nickel and palladium are back trading near prewar levels, however; the potential for more geopolitical tension and trading bans between Russia and the west could result in additional market volatility.
Commodity prices caught in the crosshairs
The impact of commodity prices is always an important factor for investors across asset classes to consider. But several factors came together in 2022 to put a target on commodity prices as a primary market mover. Just about every sector has felt the impact of commodity price swings this year.
Fluctuations in energy, metal, lumber, and soft commodities like food inputs have contributed to the increase in volatility this year—and they've been a primary impetus for the Fed taking an aggressive stance in hiking rates in an effort to fight inflation.
Typically, commodity prices are broadly influenced by the business cycle (they generally rise when the economy is expanding and demand is relatively higher, and they generally fall when the economy is contracting and demand is relatively lower). But over the past several years, global trade wars, COVID, the war in Ukraine, central bank rate hikes, and exchange rate fluctuations have disrupted those patterns.
The bottom line remains that investors may have to continue closely monitoring oil, metal, food, and other commodity prices for the foreseeable future.