Why Commodities Could Be Active This Year

Why Commodities Could Be Active This Year

What you'll read in this issue:

TOP STORY

Commodities Could Be Active Amid Inflation

While deflation was a theme for commodities in 2024, inflation is an area to watch in 2025.

Background: The Bloomberg Commodity Index (BCOM) is designed to reflect the performance of a diversified basket of commodities. Weights are further adjusted to cap commodity and sector exposure to further enhance diversification and limit the impact of significant price swings by any one commodity.? BCOM’s return of 0.65% in 2024 seemingly overshadows what was a volatile year for certain commodity sectors:

  • Crude oil prices rose in the spring, buoyed by strong demand and concerns about supply disruptions in the Middle East.
  • Gold and silver gained from risk-adverse buyers.
  • Big grain surpluses with bumper corn and soybean crops in the Midwest weighed on prices.

Managing Risk: Amid this backdrop, BCOM futures contracts at CME Group saw a surge in volume and open interest in 2024, up more than 35% and 123% year-over-year, respectively. As more market participants looked for opportunities to manage risk and express views on commodity market movements, options on BCOM futures were launched last September.

Why It Matters: Jim Wiederhold, commodity indices product manager at Bloomberg, says commodities could be at an inflection point in 2025, and investors should keep a close eye on both inflation and growth, two factors that can drive higher commodity prices. Commodities tend to perform well during rising inflation or rising growth, he adds.

? Read more about the highs and lows in commodities.

FEATURED ARTICLE

Corporate Bond Issuance is Growing

As economic risks increase, institutions are weighing their options for managing uncertainty.

Stats: The U.S. corporate bond market closed 2024 with strong gains as firms issued debt ahead of potential risks tied to the economy and geopolitics.?

  • Investment-grade bond issuers garnered around $1.5 trillion, up nearly 24% from 2023 according to the Securities Industry and Financial Markets Association (SIFMA).?
  • Meanwhile, sales of high-yield or "junk" notes lured $302 billion, well above the $183.6 billion in total issuance in the prior year.

Enter Credit Futures: To enable investors to manage risks around volatile credit markets, CME Group has introduced a series of Credit futures tracking Bloomberg's corporate bond indices. Launched in June 2024, they have seen average daily volume (ADV) and open interest (OI) of around 1,500 and 1,100 contracts, respectively.

Electronification: The continued electronification of credit trading has brought innovations such as real-time bond pricing and enhanced relative value analytics to traders on the Terminal, according to Fateen Sharaby, index business manager with Bloomberg Indices. This has helped improve price transparency and enable further standardization in this market.

? Read more about the surge in U.S. corporate bond issuance.

INSIGHTS

Policy Shifts Could Boost U.S. Energy Output

Regulatory changes could potentially impact crude oil and liquefied natural gas (LNG) markets.

Background: The U.S. is playing an increasingly important role in global energy markets, producing a record 13.5 million barrels per day of crude oil. Additionally, the natural gas market has been booming for years. The U.S. began to export LNG in 2016, which began the process of transforming the Henry Hub benchmark from a North American benchmark into a global benchmark.?

Oil Drilling: Lifting restrictions on drilling on public land could potentially boost production; however, prices are trading around $70 per barrel on WTI – not much higher than the cost of production. Depending on the area, cost of production can range from $40 to $65 per barrel for most fracking entities.?

LNG Exports: The new administration is lifting some restrictions on developing further LNG export facilities, which could deepen and broaden Henry Hub’s role in the world. Henry Hub natural gas prices remain low compared to prices in Europe and Asia, so those areas could remain strong sources of demand for U.S. natural gas for many years to come.

? Read more about how policy changes could impact energy markets.

Are Markets Underestimating Risks?

From inflation and interest rates to U.S. foreign policy, various risks could be ahead.

Inflation: U.S. core inflation is above the Fed’s target rate – and the U.S. isn’t alone. Core inflation is running above central bank target rates just about everywhere in the world outside of China. As this year begins, bond yields so far have been rising sharply around the world in anticipation of fewer-than-previously-anticipated rate cuts.

Equity Markets: The S&P 500 was up over 20% in each of the past two years, but now valuations may be getting stretched. Will higher bond yields destabilize the equity market and eventually provoke a correction?

Quotable: “There are some signs that the labor market is slowing and household finances are under strain from the cumulative impact of higher interest rates,” said Erik Norland, CME Group Chief Economist in a recent video. “Defaults on private credit are also rising sharply, so an economic slowdown is possible in the U.S. Much of the world is already growing slowly.”

? Read more about the macro factors to monitor this year.

U.S. Agriculture May Face Challenges

Amid ongoing uncertainty around weather, policy changes and global crop production, there’s no shortage of areas to monitor in agricultural markets this year.

A Mixed 2024: The January 10, 2025 WASDE marked a significant downgrade in standing projections of many 2024/2025 marketing year metrics, boosting futures prices as current supplies fell below previous expectations. After years of increased production costs, smaller margins and higher competition from abroad, farming communities are hoping for improvements. The Purdue University/CME Group Ag Economy Barometer?touched 88 points last year – the lowest since 2016. However, it also rallied to 145, the highest since 2020, after the U.S. election.

South America Competes: Corn and soybean production in South America have been steadily rising, supported by weaker local currencies and lower costs. With the rise in the U.S. dollar, that trend could continue. While the U.S. sees high domestic usage of corn and soybeans, in South America a much larger share is exported, increasing competition for U.S. shipments.

Low River Levels?: Drought sent the Mississippi River to troublingly low levels for the third straight year during the crucial transport months of September and October of 2024. Low river levels means that barges need to limit the amount of grain they transport, increasing transport costs per bushel.

? Read more about what could be ahead for U.S. agriculture.

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