WisdomTree ETF: Commodities as a group rose 5.1% last month powered ahead by the energy sector (up 14.4%).
Nitesh Shah, Director, Research, WisdomTree
The big picture
2021 is clearly shaping up to be a year of acceleration for climate policy and action. Natural gas, heralded as the bridge fuel to a low carbon future, posted the highest gains within the commodity complex. The energy crisis in China and Europe has paved the way for a sharp rise in energy prices.
There have also been strong signs of demand rationing with parts of the Chinese industry being mandated to cut back and high gas prices impacting the fertilizer industry in Europe. Further rationing in the gas markets in the form of switching from gas to the more competitively priced coal/oil for power generation is also underway.
The decision by the Organisation of Petroleum Exporting Countries (OPEC) to stick to existing supply expansion has exacerbated tightness in the oil markets. We expect the oil market to see a sizeable supply deficit in the short term.
Russian President Vladimir Putin’s readiness to help stabilise global energy markets helped assuage some concerns towards the end of the period.
Risk assets over the past month struggled amidst a long list of concerns including the US debt ceiling, persistent supply chain bottlenecks and the unwinding of pandemic support measures by governments globally. While headwinds continue to persist, we believe the global economy remains strong and we expect above trend growth to continue well into 2022.
Meteorologists at the National Oceanic and Atmospheric Administration (NOAA) place a 70-80% chance of La Niña during the Northern Hemisphere winter 2021-22. Weather disruptions resulting from this phenomenon could provide a price-boost for several agricultural commodities, including wheat, corn, and soy.
A glance at the sectors
Down 4.0% last month with all four commodities losing ground over the period.
The most notable detractor, however, was palladium which, being down 21.8%, was the worst performing commodity in our analysis over the period. Platinum and palladium have recently faced headwinds due to both demand and supply factors.
After gaining some ground towards the end of August, gold fell again over September. Despite persistently elevated inflation prints across major economies including the US, Eurozone, and the UK, gold has struggled to build positive momentum this year.
Meanwhile, silver has been unable to find support from either of its two pillars. Falling gold prices, which correlates with silver, has put pressure on the metal, while the absence of strong positive momentum in industrial metals over the last two months has offered little respite for silver.
Gains made by industrial metals in the first half of September were lost in the second half as the group finished the period flat at 0.0%.
The sector continued to face pressure from an appreciating dollar, which now stands at its highest level since November last year. This pressure could not be offset by relatively lukewarm economic data from China where manufacturing purchasing managers’ index (PMI) for September was neither contractionary nor expansionary.
Despite its growing relevance as a battery metal, Nickel slid by 7.2% over period as it still draws more than two-thirds of its demand from stainless steel. Given the power outages facing China, nickel demand also took a hit.
Energy sector was up 14.4% over the period.
Following their meeting on 04 October, OPEC+ decided against increasing the rate of supply increases. Earlier in the summer, the group agreed to increase production by 400,000 barrels per day each month between August 2021 through 2022 – in order to bring production back to pre-pandemic levels by the end. Initial reaction in oil markets was that brent surged past $80/barrel – its highest level since October 2018 while WTI, also came close to $80/barrel, its highest level since 2014.
Natural gas prices have been on a tear this year, starting with high electricity demand from fossil fuels over the summer. This is because renewables have not received optimal conditions particularly in Europe and China this year. As a result, the two regions have competed for liquefied natural gas in international markets. Added to this, when Hurricane Ida struck the US in August, over 90% of natural gas production in the Federal Offshore Gulf of Mexico went offline. A very cold winter could create further upside risk for natural gas prices.
Agriculture sector was up 2.1% over the period.
Driven by unfavourable weather events in key US growing areas coupled with strong demand from China, cotton staged the strongest price rally within the agricultural commodity complex and attained a 10-year hight last month. Added to that, rising crude oil prices are making synthetic fibres more expensive than cotton.
The probability of a La Niña weather pattern developing this year has been increased to 70-80%, by NOAA. La Nina helps diminish a source of negative price pressure and given the backdrop of reduced stock levels for wheat (down by 18%), corn (down by 36%), and soybeans (down by 51%), La Nina could provide an upside price boost for these agricultural commodities.
Sugar prices also made gains as production in the world’s second largest sugar producer – India, is expected to remain flat, and consumption is expected to rise marginally according to the Indian Sugar Mills Association (ISMA).