Saturday, February 20, 2021

Commodities - Positive market shocks abound


Top commodity headlines from Wall Street Journal this year. Headlines are supposed to be eye-catching, but do you see some common themes?

US Natural Gas Shortage ...  2/18/21
Container Shortage  ... 2/18/21
Platinum Jumps ... 2/12/21
Diamond Prices Regain Their Sparkle 2/9/21
Wood-Pulp Prices Surge...  2/21/21
Silver Surges... 2/1/21
Palm Oil Market Soars ... 2/21/21
Stimulus Adds Fuel to Copper Rally ... 1/15/21
Shrinking Grain Supplies Send Prices Soaring ... 1/13/21
Saudi Arabia to Cut Production ... 1/5/21
Cotton Prices rise ... 1/4/21

While the focus has been on increasing equity prices, there are significant price increases in commodities. The chart shows some selected commodity moves over the last three months which actually dampens the shocks seen in 2021. The magnitudes of these price three-month changes are conservative relative to shorter-term price increases and less traded markets. For example, lumber futures prices are up 70 percent in the last three months.  

Some of these commodity moves have been demand related and others have been associated with supply shocks. The biggest moves as should be expected come from demand shocks with a supply disruption like natural gas. Many of these shocks will be corrected. It is in the nature of commodity price movements to see self-correction, yet commodity markets, in general, are moving away from a morbid period associated with a down super-cycle to a market where imbalances are more common. While we can point to market specific reasons for these increases, these gains are becoming more common.

While passive long-only commodity investing is usually a fool's game when markets have not been in backwardation, there are clear commodity opportunities that have fundamental stories that are often missing with many current equity plays.   

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