2023 features strong Q3 for commodities

The energy sector led a strong third quarter for commodity indexes, with the UBS Constant Maturity Commodity Index showing strong relative performance compared to the Bloomberg Commodity Index.

The industrial metals sector saw a slight increase of over 3%, and CMCITR’s larger exposure to this sector allowed for slightly improved relative performance versus BCOM. The near-term outlook for commodities remains uncertain as US interest rates and the US dollar continue to rise. Oil, gold, silver, copper, corn, coal, wheat, and coffee beans were among the commodities that experienced strong performance.

The energy sector also saw gains in gasoil and heating oil, driven by a global shortage of diesel refining capacity. Unleaded gas lagged due to refineries running full steam to produce diesel, and natural gas was down for the quarter but is projected to have a sharp rally early in the fourth quarter as markets approach the heating season.

The industrial metals sector saw gains of over 3%, with aluminum and zinc leading the way. China remains a concern for the sector, as it is the largest consumer of industrial metals by a wide margin. The agriculture sector saw mixed results, with large gains for sugar, cocoa, and cotton, while wheat fell around 15%. Soybeans, soy meal, and bean oil all fell marginally. The livestock sector gained 2.5% during the quarter, led by continued gains in live cattle.

The precious metals sector fell around 3.6%, led by a 4% drop in gold prices. The near-term outlook for commodities remains uncertain due to rising US interest rates and the US dollar. The sharp rise in 10-year US treasury yields in the third quarter has been a headwind for growth and commodity demand.

Over the longer term, commodity supplies are expected to be tight, leading to higher prices and continued positive roll yield. Interest rates are also likely to remain higher for longer times, providing positive returns on collateral. The UBS Bloomberg Constant Maturity Commodity Index is a total return rules-based composite benchmark index diversified across 29 commodity components from five sectors, specifically energy, precious metals, industrial metals, agricultural, and livestock.

The diversified commodity exposure of BCOM potentially reduces volatility in comparison with non-diversified commodity investments.
The energy sector rallied sharply during the quarter led by strong gains in gasoil and heating oil. There is a global shortage of diesel refining capacity that impacts both gasoil and heating oil. Interestingly, unleaded gas lagged due to the refineries running full steam to produce diesel. Unleaded gas as a byproduct was slightly oversupplied during the quarter.

WTI crude oil and Brent crude oil both rallied close to 20% during the quarter. Natural gas was down for the quarter but is projected to have a sharp rally early in the 4th quarter as we approach the heating season.