Commodities Notch Their Best Year Since Financial Crisis Rebound

(Bloomberg) -- Commodities surged the most in over a decade this year as a rebound in demand from pandemic lockdowns was met with constrained supplies, fueling inflation around the world and forcing governments to act. But 2022 may tell a different story.

The Bloomberg Commodity Spot Index, which tracks 23 energy, metal and crop futures, is ending 2021 with a 27% gain, the biggest since the 2009 recovery from the great financial crisis. Prices for everything from gasoline and corn to copper and lumber have soared, making it more expensive to fill up the tank, build houses, eat meat, manufacture cars and heat homes.

The rollout of vaccination campaigns and easing restrictions on travel and gatherings led to a surge in demand for raw materials at a time when supplies were still largely restrained due to lack of capital spending, weather-driven crop losses and logistic bottlenecks. Widespread shortages drove a rally that was particularly acute in commodity futures for near-term delivery, making the market even more attractive for funds already looking for exposure to energy, food and metals as an inflation hedge.

As 2022 dawns, though, there are growing doubts about how far commodities can keep rising as a projected slowdown in economic growth, especially in China, and a rebound in supplies will likely weigh on prices. This year's rally has put inflation at the center-stage of policy-making, with central bankers considering scaling back the massive injections of cash used to revive economies during the heights of the pandemic. The specter of rising interest rates also means commodities could appeal less to investors.

Already, hedge funds have slashed their bullish wagers on commodities by 35% since a February peak, according to data from the U.S. Commodity Futures Trading Commission compiled by Bloomberg.

On the political arena, President Joe Biden was faced with mounting criticism for the higher cost of living, in particular gasoline prices at the pump. In concert with other nations, he decided to release 50 million barrels of crude from U.S. strategic reserves as a way to stem oil's rally. Similar steps were taken by China earlier this year to rein in soaring costs for metals. What's more, the fast-spreading omicron variant has blurred the demand outlook.

Ed Morse, head of commodities research at Citigroup Inc., sees a downturn in prices of raw materials helping ease inflationary pressure in 2022.

“We're outright bearish on a whole bunch of commodities,” Morse said in a video to clients entitled ‘Deflation, Price Divergence and De-Bottlenecking...and More Volatility Ahead.'

“This is really the opposite of what we were thinking last year when we were robustly bullish across all the commodities,” he said.

The Bloomberg Commodities gauge has already dropped 6.4% since hitting a record in October and had its first quarterly loss since early 2020, when pandemic fears led to a collapse in markets such as oil.