Wide disparity in commodity prices is likely to continue into 2018 as market-specific factors dominate
The Bloomberg Commodity Index in 2017 moved sideways for the second straight year and is barely higher on the year at +0.2%. The index remains near the bottom of the 2008/2016 plunge that produced a record low for the Bloomberg Commodity index (which has history back to 1991).
Commodity prices were supported during the year by macro factors such as the -9.4% sell-off in the dollar index and substantially-improved world economic growth.
The unchanged level of the commodity index in 2017, however, hides the wide disparity in price changes among different commodities in 2017, which ranged from -22% to +33%.
The best commodity sector in 2017 was the industrial metal sector, which benefited from a revived Chinese economy and stronger-than-expected growth in the U.S., Europe, and Japan. Aluminum, in fact, was the biggest commodity gainer during the year with a 33% gain. Copper also did very well with a +31% gain on the year, helped by the recent surge on news that Jiangxi Copper Co, China’s largest producer, halted all copper production after the local government ordered the company to stop production for at least a week because of local pollution levels.
The livestock sector was the second best performer this year with cattle up +22% on the year and hogs up +11% on the year. Strong export demand for U.S. beef and pork has been a major supportive factor for cattle and hog prices this year.
WTI crude oil prices showed a mild gain of +5% in 2017 due to the OPEC/non-OPEC production cut agreement that has been at least partially successful in curbing the glut of global oil inventories. U.S. crude oil inventories have also fallen sharply since spring and are at the tightest level in nearly 3 years, although they are still in a glut. Petroleum products did well during the year due to strong demand. Heating oil rose +14% in 2017 and gasoline rose +11%.
Natural gas, by contrast, was the biggest commodity loser during the year with a -22% loss. Bearish factors for natural gas this year include strong production, ample inventories, and a warmer-than-usual autumn.
U.S. grain and wheat prices have been weak this year mainly because of large U.S. and global crops and high inventory levels. Soybeans fell -3% this year and corn and wheat both fell -9%. Coffee, cocoa, and sugar showed large declines this year mainly because of large crops.
We look for commodity prices in 2018 to be helped by strong global demand. However, we also expect commodity prices to again be driven mainly by supply-demand factors specific to each market, which means 2018 could be another year in which commodity prices take widely divergent paths.