A Decline in Commodity Prices Has Raised the Prospect That Inflation Has Peaked

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A drop in raw-materials prices—corn, wheat, copper, and others—is raising expectations that a major source of inflationary pressure may be easing.

Natural-gas prices increased by more than 60% before dropping back to end the quarter 3.9 percent lower. US oil fell from highs near $120 per barrel to close at approximately $106. Wheat, maize, and soybeans all ended up being less expensive than they were at the end of March. Cotton has collapsed in price, shedding more than a third of its value since early May. Copper and timber benchmark prices fell 22 percent and 31 percent, respectively, while a basket of industrial metals traded in London recorded its worst quarter since the 2008 financial crisis.

To be sure, many raw commodities remain historically expensive. There are other supply and demand factors at work, ranging from a fire at a Texas gas-export terminal to improved crop-growing weather. Some investors, though, are beginning to see the reversals as evidence that the Federal Reserve’s attempts to slow the economy are hurting demand.

“Moderating commodity prices are strong indication that inflation is decreasing,” said Louis Navellier, chief investment officer at Navellier & Associates in Reno, Nev.

Commodities have piqued Wall Street’s attention, with investors looking to volatile raw-material markets to forecast inflation and investing in them to offset the impact of increasing costs on the rest of their portfolios.

Commodity markets were among the few safe havens for investors amid the stock market’s worst first half in decades. Despite falling from earlier in the quarter highs, oil producers Exxon Mobil Corp. and Occidental Petroleum Corp. closed the first half up 40% and 103%, respectively. Mosaic Co., a fertilizer manufacturer, increased by 20%. Archer Daniels Midland Company increased by 15%.

This week, investors will scrutinize minutes from the Fed’s June 14-15 meeting, which are set to be issued on Wednesday, looking for hints about the pace of interest-rate rises for the rest of the year. The Fed is attempting to contain the biggest inflation since the early 1980s by decreasing demand while avoiding a recession.

According to traders and economists, part of the decrease in commodity prices might be attributed to investors who flocked into markets for gasoline, metals, and agriculture to hedge against inflation. Tracey Allen, commodities strategist at JPMorgan Chase & Co., said that around $15 billion was removed from commodity futures markets during the week of June 24. It was the fourth consecutive week of withdrawals, bringing the total amount taken from commodities this year to almost $125 billion, a seasonal high that exceeds even the flight in 2020 when economies collapsed.

“I’m not sure whether the Fed’s measures have slowed the economy, but that’s what money managers are relying on,” Craig Turner, commodities broker at StoneX Group Inc., said.

Much of the price increase may be attributed to supply limits caused by pandemic lockdowns, weather occurrences last year that lowered crops and depleted fuel supplies, and European conflict. These pressures have subsided, but supply shocks continue to startle prices.

The Energy Information Administration said this week that U.S. oil production averaged 12.1 million barrels per day for the week ending June 24, the highest level since April 2020, when the economy was slowing and companies were closing wells.

Damage from a fire at one of the country’s main liquefied natural gas exporters last month has left more of the power-generation fuel and industrial feedstock for the domestic market, easing worries of winter shortages. The EIA said that natural-gas stocks in the Lower 48 states are 12.5 percent lower than the five-year average for this time of year, down from a shortfall of approximately 17 percent in March.

Improved growing conditions in the United States, Europe, and Australia are fueling optimism that bountiful harvests will compensate for the wheat, maize, and vegetable oil stuck in Ukraine since Russia’s invasion. Grain and oilseed prices rose after the invasion, but have already dropped back to or below levels seen before to the late-February raid.

Higher mortgage rates have dampened the new house market and deflated the global lumber bubble. Meanwhile, coronavirus quarantines in China and a shift in consumer spending in the United States from commodities to services such as leisure and entertainment have darkened the outlook for cotton and copper demand.

Despite the pullbacks, some investors continue to see commodities as a safe haven in the midst of a dismal year for equities and bonds.

JPMorgan analysts believe global inventories remain low and recommend purchasing agriculture futures. They forecast a commodity basket to return 10% by the end of summer and 5% by the end of the year.

Mr. Navellier said that he has stock in oil drillers, shippers, fertilizer manufacturers, and poultry producers. “I realize prices have peaked, but they are still high,” he said. “I’m locked and loaded for second-quarter results.”

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