Key Global Drivers Will Continue Pushing Commodities In 2022

A quick look at central bank and government policies in the wake of the pandemic will easily help conclude that there is a highly bullish trend for commodity prices.

In early 2020, when the pandemic caused selling in markets across all asset classes, there was a warning that quantitative easing, historically low interest rates, and simulative fiscal policies were highly inflationary.

While the pandemic was a completely different event than the 2008 global financial crisis, the monetary and fiscal policy tools were the same. The only difference was the tidal wave of central bank liquidity and tsunami of government stimulus programs were at far higher levels in 2020 than in 2008.

Since mid-2020, commodity prices responded in a bullish relay race that took metals, energy, minerals, and agricultural raw material prices to multi-year, or in some cases, all-time highs throughout the period.

Commodity prices rallied from the 2008 lows until 2012 in the wake of the financial crisis. COVID-19’s economic legacy is likely to last for years, and the price tag is inflation. It is expected that commodity prices to continue to experience a bullish relay race into 2022 and beyond.

Bull markets rarely move in straight lines, and commodities are highly volatile assets. Fasten your seatbelts for a continuation of head-spinning moves in the raw materials sector in 2022.

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The critical factors that will impact commodity markets in the coming year will be: Inflation: The highest level of the economic condition in nearly four decades will be a primary diver of prices in 2022. While the US Fed forecasts short-term interest rates will rise to 0.90% in 2022 and 1.60% in 2023, real interest rates will remain in negative territory even if inflation begins to recede.

Demand: Economic growth or contraction will dictate the path of least resistance of prices. A greener path toward energy policy will increase the demand for many commodities, including battery metals and other minerals. Meanwhile, the world continues to depend on fossil fuels. Lower US output could weigh on oil, gas, and coal supplies, critical ingredients in commodity production. Higher input costs push prices higher.

Supply chain bottlenecks: Pandemic-inspired logistical issues drove prices higher in 2021. Labor, transportation costs, and virus variants could continue to cause periodic bottlenecks leading to supply shortages. Higher wages increase production costs.

Population growth: While the pandemic caused many fatalities, the global population continues to grow at around 20 million per quarter. In 2022, people worldwide will require more essential products than in 2011.

Geopolitical tensions: The US relations with China and Russia continued to deteriorate in 2021. Iran and North Korea pose a rising nuclear threat. As US energy policy addresses climate change, the world becomes more reliant on OPEC and Russia for traditional energy products.

OPEC+’s mission is to achieve the highest possible oil price for its members while balancing the fundamental supply-demand equation. Lower US output changes the equation and tips the balance favoring higher prices. Moreover, Russia has become the world’s leading wheat exporter, giving President Putin control of the world’s most political commodities; crude oil and wheat, the primary ingredient in bread.

The weather: Climate change is impacting global crop production. Grain prices rose to multi-year highs in 2021. The commodities that feed the world are heading into 2022 in bullish trends.

These factors and the potential for other unforeseen issues favor a continuation of the bullish price action in commodities that began with the pandemic-inspired 2020 lows.