Commodity bull market enters dangerous phase as prices surge

A broad-based commodity rally, encompassing energy, agricultural products, and metals, has entered what is described as a dangerous new phase, reaching levels not seen in over a decade. The Bloomberg Commodity Index has climbed to its highest point since 2012, while the Quantix Commodity Index has set a new record high. Analysts, including former Goldman Sachs commodities head Jeff Currie, have previously warned of growing scarcity in the physical economy.

Bloomberg macro strategist Simon White noted that the rally is broadening beyond just oil, with significant price increases observed in European gas (up 34%), gasoline (+22%), metals like zinc and copper, precious metals such as silver, platinum, and gold, and soft commodities like sugar, cocoa, and corn since the beginning of August. Only a few commodities, including hogs, cattle, nickel, and orange juice, have seen price declines in the same period.

The surge in commodity prices, particularly in energy, impacts input costs across manufacturing and food production. Elevated prices for diesel and gasoline, exacerbated by refinery capacity issues linked to the Iran war, are increasing transport costs. The escalation of the Russia-Ukraine war, especially in the Black Sea region, along with concerns about a potent El Nino, are further pressuring soft commodity prices.

White cautioned that the sustained rise in raw material prices raises concerns for equity markets. Historically, periods of high commodity prices, such as the 1970s and early 2010s, have coincided with stock market underperformance. The current environment, where both stocks and commodities are rising, is seen as an anomaly, with potential for further downside in equities if commodity prices remain elevated. Copper has reached an all-time high above $14,700, and iron ore prices in Singapore are around $100 a ton, reflecting the tightening supply dynamics.