So far it has been a great year—at least for paper assets. Long-dated U.S. Treasuries are up 4%, high yield 6%, the S&P 500 nearly 10% and emerging market equities over 17% in U.S. dollar terms. But it has been a less inspiring year for commodities.
Some investors are wondering whether softer commodity prices represent a sign of economic deceleration—along with a flatter yield curve and decelerating inflation—or an even bigger threat. For now, I think the answer is no. Here are three reasons why:
Commodities prices have witnessed significant divergence
Not all commodities have done poorly year-to-date. The weakness in some commodity indexes has been largely about energy. Oil prices are down nearly 20%; natural gas has done even worse. However, metals have performed better along with select agricultural commodities, notably corn and wheat.
The drop in energy has been as much about supply as demand
It is true that oil demand has slipped: The International Energy Agency (IEA) puts worldwide crude demand in the first quarter at 96.45 million barrels per day (bpd), down from over 97.60 million bpd at the end of 2016. However, compounding the problem has been a rebound in supply. Two OPEC countries in particular have surprised with higher production: Libya and Nigeria. Libyan production has quadrupled from last fall’s low, while Nigerian production has risen by more than 300,000 bpd since last August. At the same time, U.S. shale producers continue to demonstrate remarkable resiliency in the face of lower prices. U.S. domestic crude oil production has climbed by almost 600,000 bpd since late December and by nearly one million bpd from last fall’s lows.