- United States Oil Fund LP (NYSEARCA:USO)
- Teucrium Wheat Fund (NYSEARCA:WEAT)
- iPath Series B Bloomberg Nickel Subindex Total Return ETN (NYSEARCA:JJN)
- iPath Series B Bloomberg Aluminum Subindex Total Return ETN (NYSEARCA:JJU)
- United States Copper Index Fund (NYSEARCA:CPER)
- Aberdeen Standard Physical Palladium Shares ETF (NYSEARCA:PALL)
- SPDR Gold Shares (NYSEARCA:GLD)
After a strong performance in 2021, commodities look to be heading for a multi-year bullish run. The Invesco DB Commodity Index Tracking Fund (NYSEARCA:DBC), one of the largest broad-based commodity ETFs, surged 41.3% in 2021 to $20.78 per share.
DBC continued in this bullish direction this year, gaining another 20.85% year-to-date to $25.21 per share. Commodity tightness derives from a confluence of factors.
Restrictions and curfews during the Covid-19 pandemic created a supply shock that disrupted distribution chains, driving commodity prices higher. On the other side, economic activity rebounded significantly after the pandemic, propelling global commodity demand.
More recently, the invasion of Ukraine by Russia heightened geo-political tensions, pushing commodity prices to a fresh all-time high. These developments have raised awareness of the growing exposure to Russia’s commodity sector. Furthermore, rising inflation expectations should continue to sustain the bullish run of the commodity complex.
With that being said, let’s have a look at the commodities investors need to keep an eye on, as geopolitical turmoil grows.
Energy Commodities: Crude Oil
Since the beginning of the conflict in Ukraine, the bullishness of oil commodities markets extended. The United States Oil Fund LP, one of the largest proxies of oil markets advanced significantly year-to-date, up about 36% to $73.68 per share. In the meantime, the SPDR S&P 500 Fund ETF (NYSEARCA:SPY) dipped 7% to $441 per share.
The fundamental backdrop on oil remains favorable, even if oil markets have witnessed a short-term correction in the past few days. Demand for 2022 is projected to hit a record high on the back of recovering air travel.
With Organization of Petroleum Exporting Countries (OPEC) members continuing to limit supply, global oil demand surpasses supply. In addition, recent geopolitical turmoil in Eastern Europe lifted speculative positioning on oil, sending the black commodity close to a ten-year high, as fears linked to increasing oil supply scarcities soared.
Russia is one of the biggest oil suppliers in the world, with approximately 10.7 million barrels per day (mb/d) of oil produced in 2020. Raising restrictions on the oil giant is bullish for oil markets.
Nevertheless, positive developments on the Iranian nuclear deal are esteemed to ease tension on oil markets. If a compromise is found, the oil supply is forecasted to get a boost of 1.3 mb/d.
Meanwhile, the ongoing gap between the OPEC output and target levels persist, anticipated global supply strains will rise, increasing the likelihood of more volatility and upward pressure on oil prices.
Agricultural Commodities: Wheat
Wheat prices have also been affected by rising geopolitical turmoil. After reaching a high of $1425.25 per bushel, US Wheat futures for May 2022 skyrocketed 45.7% year-to-date to $1,128.38 per bushel.
The complex soared 27.8% since February 24, when Russia declared war on Ukraine.
Meanwhile, theTeucrium Wheat Fund, an ETF with exposure to wheat future contracts, soared 40.17% year-to-date to $10.19 per share.
The recent rally in wheat prices could potentially be set to continue for an extended period, as a rapid resolution of the war in Ukraine looks improbable.
More than a quarter of the world’s wheat exports come from Russia and Ukraine. Russia is the world’s biggest wheat exporter, with a yearly production of 76 million tons per year, representing more than 18% of international exports in 2019, whereas Ukraine was the fifth largest exporter of wheat, with a market share of 7%.
Heightening sanctions on Russian exports and the war in Ukraine will continue to weigh on wheat supply, sustaining higher wheat prices.
Consequently, speculators are likely to continue to push prices to a new high. Investors anticipating an embargo lift on Russia’s commodities should keep an eye on wheat.
Nickel prices have ballooned 133.01% year-to-date to a record high of $48,200 per ton after tremendous speculative bets rushed on the metal. The iPath Series B Bloomberg Nickel Subindex Total Return ETN jumped 44.42% to $41.27 per share on the period.
The production of nickel in Russia has been esteemed at 250,000 tons in 2021, accounting for approximately 7% of the global nickel market. While Russia’s market share is not substantial, rising geopolitical turmoil had a material impact on nickel prices.
Heightening fears of supply shortages, amid an intensifying war between Russia and Ukraine, generated this massive rally in the metal commodities. In addition, the supply-demand deficit increased in the past year, following decreasing
Chinese output and solid demand for stainless steel and batteries for electric vehicle manufacturing. Furthermore, declining nickel inventories in LME warehouses, falling by 21.46% to 79,524 tons at the end of February 2022, from 101,254 at the end of December 2021, contributed to the metal price strength.
Another commodity that is poised for increased volatility as geopolitical turmoil increases is aluminum. After reaching an all-time high of $3,966 per ton on March 7, aluminum prices are up 24.4% year-to-date to $3,483 per ton.
While aluminum prices corrected in the past week, the rally on the aluminum complex has been begun after Kremlin’s ‘special military operation’ announcement.
In the meantime, the iPath Series B Bloomberg Aluminum Subindex Total Return ETN, an ETF seeking to replicate the aluminum complex, advanced more than 18% year-to-date to $71.59 per share.
The fundamental picture of the complex has been tight in the past few months. The aluminum rally is due to low inventories and rising fears of additional supply-chain disruption.
Three of the world’s largest contained lines, MSC, Maersk, and CMA CGM halted cargo shipments to and from Russia, following the invasion of Ukraine, sustaining concerns on amplifying supply difficulties.
Russia through the aluminum giant, United Company Rusal International, produced 3.8 million tonnes of aluminum in 2021, accounting for 6% of estimated global production.
Besides, aluminum inventories dwindled in the past year. Stocks at the LME warehouse decreased to 762,775 tons in March 2022 compared to nearly 2 million tons in March 2021.
Copper, one of the most used commodities for industrial applications, has been historically used as an advanced indicator to measure the direction of the global economy.
After reaching an all-time high of $5.03 per pound on March 4, the copper price rally withdrew 10.87% to $4.49 per pound and the complex is now up marginally year-to-date, up 0.9%. Meanwhile, the United States Copper Index Fund advanced slightly since the beginning of the year, up 6% to $28.59 per share.
The upward price pressure on the cooper complex has not been that vigorous compared to other commodities. Nevertheless, Russia has an esteemed production of 820,000 metric tons of copper in 2021. The country is a top-10 copper producer, with a market share of 4%.
The fundamentals of the cooper complex have been healthy in the past years. However, Chile the world’s largest supplier with a market share of about 25% dropped throughput in recent months, after water scarcity issues and low-grade copper quality extractions.
Besides, rising supply-chain headaches in Russia will lift uncertainties on the complex, and higher than expected inflation prints in Western economies should boost volatility on the metallic commodity.
Palladium is a key component for gasoline engine autocatalysts, enabling lower car emissions. Palladium spot prices rose significantly since the beginning of the year.
The complex gained 31% year-to-date to $2,485.27 per ounce, amid increasing supply risks. The Aberdeen Standard Physical Palladium Shares ETF surged more than 31% to $233.40 per share.
Russia is a dominant producer of palladium, with a yearly production of 74 metric tons in 2021, representing of approximately 40% of global palladium production.
With a tight supply and high demand for gasoline engines, palladium bullishness might not take investors by surprise, after it hit an all-time high of $3,302 per ounce on March 8. Indeed, further hikes on palladium prices are still on the table, if the international response to Russia’s invasion of Ukraine intensifies.
Limiting or banning the trade of Russian metals, will have a significant impact on the palladium prices, maintaining the complex above historical average prices.
Gold is another component of the commodities complex that investors should keep on their radar.
Since the beginning of the year, bullion prices gained 5.43% to $1,930.45 per ounce and are close to the latest high of $2,158.99 per ounce reached in July 2020. SPDR Gold Shares, the biggest ETF seeking to replicate the performance of gold advanced 7.4% year-to-date to $180 per share.
Gold production in Russia totaled 363 metric tons in 2020, placing the country as the third-largest player after Australia and China.
While recent geopolitical developments did not have a material impact on gold prices, increasing pressures on the Russian economy should provide additional upside. The yellow metal has historically been a safe haven in periods of high equity markets volatility.
On the opposite side, demand for gold is expected to be weak going forward, amid central banks tightening monetary policies around the globe, combined with dollar strengthening.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.