Commodities are on track for their best quarter in more than 30 years after Russia’s invasion of Ukraine supercharged a rally in markets from oil to wheat and nickel.
The war has disrupted traffic on goods coming out of the Black Sea, curtailing supply and sparking sharp price swings across financial markets. Nervous investors are weighing the fallout from the conflict along with higher interest rates from the Federal Reserve, which could threaten the economy’s post-pandemic recovery. At the same time, a sharp run-up in commodities prices has some investors and economists worried about inflation jumping even higher from here.
The S&P GSCI
a benchmark tracking the prices of commodities futures from precious metals to livestock, has climbed 34% in the first quarter, on pace for its biggest gain since 1990.
“When the supply and demand situation is tight and then you have another supply shock on top of that, it’s not surprising that prices spike even further,” said Chris Burton, global head of commodities and portfolio manager at Credit Suisse Asset Management.
U.S. crude oil prices have climbed 43% to $107.82 a barrel since the end of last year and rose as high as $123.70 in early March, a level last seen in 2008. That rally propelled gasoline prices to record levels, pinching American consumers at the pump.
The ripple effects have spread to other commodities. Wheat has gained 33% this year to trade at its highest level since 2010, while corn has added 24%. Many metals—aluminum, copper, nickel and palladium—hit new highs as well.
The rally extends last year’s rebound, which was driven by higher consumer demand for goods and services when the economy reopened after the Covid-19 pandemic, coupled with tightening supply due to shipping bottlenecks and bad weather. The gains stand in contrast to commodities’ performance over the past decade when years of oversupply and low demand had dragged prices down.
Fed officials are closely watching the surge in prices of raw materials as they embark on a campaign to raise interest rates to tame inflation. The central bank increased rates by a quarter-percentage-point at its March meeting, and Fed Chair Jerome Powell has hinted since then at the possibility of more aggressive increases at the coming meetings.
Commodities are often seen as an attractive hedge against the rising prices of goods and services. Investors have poured money into general commodities’ mutual and exchange-traded funds for 11 consecutive weeks, according to Refinitiv Lipper data through March 23, the longest streak since a 23-week run that ended in June 2021.
One group benefiting from the higher prices: mining and energy companies. Freeport-McMoRan Inc.
shares have shot up more than nine fold from their low in March 2020, thanks to an advance in copper prices. Meanwhile, Devon Energy Corp
has jumped more than ninefold, while Halliburton Co.
and Marathon Oil Corp
have jumped more than sevenfold over the same period.