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Why Are Commodities And Oil Prices Soaring?

Why Are Commodities And Oil Prices Soaring?

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%.

Related: Why are Investors Worried about Ukraine?

Why Are Commodities And Oil Prices Soaring?

Oil producing nations like the members of OPEC+ and oil companies in the U.S. will stand to gain the most from this profound era of peak oil. However, they won’t be alone. Plenty of other commodities are rising – natural gas rose 9% last week, Newcastle coal futures topped a record high after adding a monster 75%, and nearly every energy commodity was up double-digits on the month.

Other “genres” of commodities also appreciated some mean gains. Among them were metals such as palladium (+26.9% on the week), aluminum (+16.2% on the week), iron ore (+15.3% on the week) and zinc (+13.9% on the week.)

However, the most unexpected glo-up of this week came from… wheat. Yeah, really. In some show of confidence, the price of wheat rose 34.7% week-over-week, to $1,145/bushel. Other agricultural commodities also rallied – which has us feeling as though we’re living back in agrarian times.

Related: How does diversification help when the stock market is down?

In summary, this lesser-covered corner of the market is exploding (in a good way) while the rest of the market seems to be imploding (in a bad way.) As it stands, many commodities have outperformed the S&P 500 and Nasdaq this year. Will they keep doing that? Hard telling. There’s absolutely no guarantee that this momentum will keep up forever (zoom out on this chart and you see violent ends to these kinds of price movements.) 

That said, the market is pricing many commodities aggressively – which insinuates that investors have great uncertainty about the outlook in economies and geopolitics.

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