April 22, 2022
This week has been explosive for commodities, a lesser-known portion of the market which gets lumped in with so-called “alternative strategies.” These are strategies your wealth manager probably won’t recommend you. However, amid their meteoric rise (and the stock market’s very sad fall), investors are starting to look at commodities, especially oil and gas more seriously… even if many don’t even know what commodities are.
In short, commodities refer to economic resources – foods like corn, energy products like oil, precious metals like gold, livestock products like live cattle, or other assorted goods such as lumber, dairy products, or coffee. In some sense, you can think of commodities as a shortlist of the finer things in life – and they’re so fine that traders trade them on markets, but in a fundamentally different way than you’d trade your stocks and bonds.
Trading commodities and alternatives isn’t easy, and timing trades requires a seasoned read of geopolitical, macroeconomic, and niche market conditions. However, one thing changed all of that: the COVID-19 pandemic. The pandemic briefly destroyed the value of anything you could buy or sell – but like all things, old habits die hard. When the market got pumped full of that good ol’ stimulus money, commodities prices soared.
In fact, some commodities actually performed better than market benchmarks like the S&P 500. This is unlike commodities, which generally see their prices trend down and to the right as the market perfects more ways to exploit valuable (and desirable) resources. However, a supply chain shock left the market blindsided… and the latest double-punch (a global pandemic, followed by an unexpected war) rolled out the red carpet for commodities’ unprecedented year.
No other commodity has been more central to that double-punch than oil, which went negative during the COVID-19 pandemic (seriously). However, nearly two years later, oil prices have notched $100/barrel. In just the last week, as Russia’s invasion of Ukraine weighed heavier on markets, oil prices in the U.S. rose more than 25%.