The S&P GSCI rose for a fourth consecutive month, by 1.6% in July, as the main positive catalysts of 2021 remained in play. Many individual commodities constrained by supply chain bottlenecks and disruptions continued to be in deficit around the world. Half of the U.S. experienced drought conditions last month, compared to 25% this time last year. Reopening and reflationary demand continued to pick up. Inflation readings were again released higher than expected. Everyone has a story about something being more expensive than it was a year ago. The Fed maintained its dovish supportive posture that inflation is transitory. A concern on market participants’ minds was how disruptive the spread of the Delta variant of COVID-19 might get and if it could cool off the outstanding YTD performance of commodities. Exhibit 1 shows the performance of the S&P GSCI by sector, with Energy and Industrial Metals outperforming YTD and July performance muted overall.
Within Energy, the S&P GSCI Unleaded Gasoline rose 4.54%, beating out heating oil as the top performer in the petroleum complex. Summer driving demand in the northern hemisphere continued to be one of the key drivers for gasoline. The S&P GSCI Natural Gas broke higher by over 7.71% in July. The U.S. Energy Information Administration reported that Natural Gas makes up 40% of annual U.S. electrical generation. It is a key commodity to watch in the global energy transition, as it is viewed as a less carbon intensive commodity than other, higher emitting ones. Another interesting note from the report showed renewables now make up 21%, beating out nuclear and coal-based generation for the first time ever. The green transition continues to be one of the key thematic stories inspiring commodity price action.
The S&P GSCI Nickel led the way for the metals, rising 7.34% on the month. Mostly used to create stainless steel, Nickel is also used extensively in electric vehicles. Most electric vehicle metals edged higher in July, as new competitors to Tesla drove enthusiasm in the space. Preorders for new electric vehicles exploded, with many people willing to wait to own a new electric vehicle as opposed to paying current inflated used car prices. This helped to push the S&P GSCI Copper up 3.59% for the month. Four times as much copper is needed in the average electric vehicle as is needed in the average internal combustion engine vehicle. Copper was also influenced from the supply side with the potential for a strike coming as labor talks broke down at BHP’s Escondida copper mine in Chile, the world’s largest copper mine.
Across Agriculture & Livestock, the Softs stood out. The S&P GSCI Coffee sprinted past the rest, rising 12.04% due to extreme frost conditions, erasing 10% of Brazil’s crop production for the year. Brazil is the number one coffee producer in the world, with a 40% share of global output, double that of the next highest producer. The S&P GSCI Corn fell the most, down 8.72% as the highly liquid CME July contract expired, with traders taking profit or moving exposure to the December contract. The S&P GSCI Lean Hogs rose another 1.20% in July, bringing the YTD performance to an impressive 29.24%. No matter if the pandemic gets worse or tapers off, everyone still wants to bring home the bacon.The posts on this blog are opinions, not advice. Please read our Disclaimers.