While the commodity complex suffered in June, sticky inflation and secular under-investment in commodity production capacity presents long-term investors with opportunities in the period ahead. Real assets remain attractive for real earning power with a defensive orientation, as well as portfolio diversification.

Percentage of U.S. oil refinery operable capacity that is utilized
Weekly, 2015 – present

Line graph showing the percentage of U.S. oil refinery operable capacity that is utilized on a weekly basis from 2015 - July, 2022, which is currently at 94.9%

U.S. Department of Energy, Energy Information Administration, Principal Global Investors. Data as of July 8, 2022.

While inflation has prompted both stocks and bonds to experience historic drawdowns during the first six months of 2022, commodities have rallied sharply. Since the start of 2022, natural gas prices are up 78%, brent crude up 25%, and iron-ore up 7%. The commodity complex, especially energy, has been the stand-out strategy to mitigate inflation.

In recent weeks, however, global economic strength has faded rapidly, driving markets to become increasingly fearful of recession and, therefore, cool commodity demand. Commodities have suffered double-digit losses in the past month, with brent crude down 20%, industrial metals down 19%, and natural gas down 8%.

For long-term investors, this short-term pain presents opportunity. Although demand may be weakening, it remains firmly above supply. Limited capital expenditure in fossil fuels capacity, coupled with geopolitical tensions, means structural supply deficits that are supportive of commodity prices. Crude oil refinery capacity is back to its tightest level since before the pandemic, and supply will likely remain scarce in the years ahead.

Investors may worry that that the commodity rally has run its course. However, recent dips in commodity prices could enable investors to gain exposure to a potential long-term outperformer.


Commodity prices are represented by:
Natural gas: NYMEX Futures ‘NG’ Generic 1st Contract
Brent crude: ICE Futures ‘CO’ Generic 1st Contract
Iron-ore: Dalian DCE Futures ‘IOE’ Generic 1st Contract
Industrial metals: Bloomberg industrial metals Subindex

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