February saw commodities continue their impressive start to 2019. The S&P GSCI was up 3.8% in February and up 13.1% YTD, while the Dow Jones Commodity Index (DJCI) was up 1.9% in February and up 7.4% YTD. Solid performance in petroleum prices continued to support both the S&P GSCI and DJCI, while lagging grain prices detracted marginally from overall market performance. One notable feature of the commodities markets so far this year has been the outperformance of the more industrial commodities (namely energy and industrial metals), compared to the performance of precious metals and particularly the lagging agriculture and livestock commodities. When considered in combination with the strong performance of other asset classes, such as U.S. and emerging market equities, it is likely that much of the strength in commodities markets has been driven by a general improvement in investor confidence and an associated fall in the perceived likelihood of a global economic slowdown, as opposed to any specific commodities supply and demand drivers.
The early-2019 surge in oil prices has reflected concerns regarding a supply shortfall, on the back of sharply lower production in a number of key OPEC countries, including the perilous demise of Venezuela, but there are nascent signs that growth in demand will be weaker this year, which could elevate some of the pressure on supply. The S&P GSCI Petroleum ended the month up 7.7% and 23.5% YTD. To date, Saudi Arabia has shouldered the bulk of the OPEC production cut burden, and this was the focus of the cocktail party circuit during International Petroleum Week in London at the tail end of the month. Other topics of debate included the uncertain economic outlook tied to U.S. trade policy, geopolitical risk surrounding Venezuela and Iran, the implications of the 2020 IMO mandate forcing shippers to cleaner burning fuels, the risks associated with global demand, and last but not least, the U.S. shale supply juggernaut and growing U.S. oil exports.
Renewed optimism regarding the likelihood of a trade deal between the U.S. and China supported industrial metals in February. The S&P GSCI Industrial Metals rose 3.1% in February, while the DJCI Industrial Metals was up 4.0%. Copper was the star performer (up 5.9%), while nickel continued to surge higher (up 4.6% in February and up 22.1% YTD). Refined metals have been flowing in sizable volumes to China, reducing availability in the rest of the world and further pressuring global metal exchange stocks, which are already low—a function of relatively weak mine supply growth and some changes to LME warehouse rules.
The S&P GSCI Gold struggled to maintain its recent strength into month end (down 0.5% in February but still up 2.6% YTD). Providing a solid foundation for bullion during the bulk of February was U.S. Fed Chairman Jerome Powell’s reiteration that the central bank would remain “patient” while deciding the future of interest rates. A precious metal requiring little support from central bankers so far in 2019 has been palladium; the S&P GSCI Palladium has surged 26.7% YTD. The auto catalyst metal has climbed on the back of widening supply tightness, while threats of strikes by mineworkers in South Africa has added further support.
Across the agriculture complex, performance was skewed to the downside (S&P GSCI Agriculture down 5.0% for the month and off 2.9% YTD). Wheat had a particularly challenging month, with both the S&P GSCI Wheat and S&P GSCI Kansas Wheat ending the month down more than 11%. Wheat has come under pressure amid concerns that U.S. exports will continue to face stiff competition in global markets particularly from more competitively priced Black Sea wheat suppliers such as Russia.
The S&P GSCI Livestock was up a marginal 0.2% for the month. Lean hogs (down 7.0% for the month and off 13.6% YTD) continued to be a drag on the broader index due to much higher levels of U.S. pork production than expected and ongoing market access restrictions for U.S. pork in key export markets. Should China and the U.S. reach an agreement on trade, the lean hog market may prove to be a major beneficiary.
See more details on how the commodities measured by the S&P GSCI and the DJCI fared here.