Commodity price trends are diverging across different classification types. This is a shift from the trend in the second half of 2020 into the end of 2021, and the initial reaction to the news of the Russian invasion at the end of February, when all commodities were increasing. This shift in the trend could have implications for economic growth and inflation in the coming months.
Energy commodities (in the U.S.) have been the strongest area, partially related to the concerns about supply related to disruptions in Russia and Ukraine and partially related to a lack of spare capacity and inventories in other producing nations (including the U.S.). Oil prices (West Texas Intermediate) are up 83% year-over-year and over 25% in the last three months. The pace of acceleration has slowed for oil, but gasoline prices (Reformulated Blendstock for Oxygenate Blending or RBOB) are up 91% y/y and over 40% in the last three months. That pace is accelerating and could put upward pressure on gasoline prices into the summer.
Natural gas prices in the U.S. are up 212% year-over-year and over 75% in the last three months. Coal prices are up 300% year-over-year and 113% in the last three months. Those paces are also accelerating and could put upward pressure on electricity costs just as air conditioning demand is set to increase.
These increases in gasoline and electricity costs are coming at a time when consumer incomes are slowing on a nominal basis, due to the decline in fiscal support, and on a real basis due to the rise in consumer prices. Higher fuel costs will likely be a continued headwind to consumer incomes and spending.
Natural gas prices outside of the U.S. have been moving in the opposite direction in recent months. In the United Kingdom, natural gas prices are up over 200% year-over-year, have declined by 30% in the last three months and have declined 45% in the last month (and are below where they were prior to the increase following the Russian invasion).
Natural gas prices in Europe are starting to move in the same direction, on a bit of a lag. European gas prices are still up an incredible 450% year-over-year, the three-month increase has slowed to 27%, and prices have declined by 6% in the last month.
A deceleration in natural gas prices could lead to a much needed drop in producer prices in Europe, which increased to a record 37% year-over-year in the month of March.
The agriculture/crop portion of commodities has become a major focus due to concerns about supply, as Ukraine and Russia are large exporters of wheat and corn. Corn and wheat prices had been in an upward trend since the summer of 2020 and accelerated after the Russian invasion. The growth rate has slowed since then and wheat and corn are below their prior highs.
Other crops that are not directly linked to Russia and Ukraine have slowed, with oats up 1% in the last three months and down 14% in the last month, soybeans are up 3% year-over-year, and soybean meal is down 5% in the last three months.
Meat prices have also been declining recently with live cattle down 6% in the last three months, lean hogs are down 4%, and beef prices are down 3%.
A slowdown in the prices of food costs would be a positive for consumer spending and could help slow the pace of acceleration for measures of inflation.
The metals component of commodities has been the weakest. Many of the metals tied to Russia spiked in the early days after the announcement but have since reversed. Aluminum spiked in late February but is down 6% in the last three months and well below the recent high. Lead, Iron Ore, Steel, Zinc, Nickel also increased in late February and are now below those levels.
Precious metals like Palladium and Platinum that are mined in Russia spiked in late February but have resumed the downtrend they were in prior to the invasion and are down over 25% year-over-year.
Copper is viewed as one of the more economically sensitive metals and a good leading indicator for industrial production and economic demand. Prices moved up after the invasion but are now down 5% in the last three months and 6% year-over-year.
Falling prices for industrial and economically sensitive metals could be an indication that demand is declining, and economic activity will likely slow in second half of 2022.
The current divergences in commodity prices could be forecasting an environment where consumer spending is negatively impacted by higher energy costs at a time when economic activity could be slowing, further negatively impacting consumer incomes and spending.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
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Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC