investment viewpoints

Commodities strike back

Commodities strike back
Laurent Joué - Senior portfolio manager

Laurent Joué

Senior portfolio manager
Florian Ielpo - Head of Macro, Multi Asset

Florian Ielpo

Head of Macro, Multi Asset

In the latest instalment of Simply Put, we explore whether the recent strong performance of commodities is sustainable and whether there is still time for investors to benefit.   


Need to know

  • Commodity performance has been particularly strong this year, but the risks are also increasing. The entire commodity risk premium has adjusted.
  • Skewness in these markets has become more negative, and the percentage of markets in backwardation has reached a level not seen in the period 1990-2022.
  • While the commodity trend has moderated recently, the asset class is still going strong and its high carry should continue to benefit investors.


Commodities have recently experienced a period of growth and increased volatility. This is a rather unusual situation in the history of these markets and raises a key investment question: is there still time to gain exposure to commodities? The answer is twofold: commodity prices could still rise (demand remains strong and supply disrupted) and investors could also benefit from an abnormally high carry.  This second point could make a real difference in the coming months.

Let's first look at the mechanics of the commodity risk premium. Typically, demand plays a more important role than supply in commodity markets. Periods of growth, and thus of strong cyclical demand, tend to correspond to periods of rising cyclical commodity prices. In contrast, a contraction in demand resulting from a recession, for example, usually leads to a contraction in demand for commodities as well as a collapse in prices. In statistical terms, this leads the returns for most cyclical commodity markets to be characterised by a left skew. Statisticians refer to this as a “negative skewness”, as strongly negative returns occur more frequently than strongly positive ones. Academics tend to agree that a risk premium can be characterised by negative skewness. Another important element is that downturns are usually accompanied by increased volatility, so that returns and volatility are negatively correlated. In short, commodities are indeed a risk premium in this respect, as shown in Chart 1.


Chart 1. Skew and risk/return correlation among commodity markets

Multi-Asset-simply-put_skewness commodities.svg

Source: LOIM. Bloomberg. 1900-2022.


2022 may be giving the impression of a very different situation: strong demand combined with supply disruptions, following the pandemic and the Russian invasion of Ukraine, have generated a prolonged run of positive commodity returns. Yet commodity skewness has not become less negative – quite the contrary. The negative correlation between returns and volatility has grown. From this point of view, 2022 is characterised by an increase in the risk markers for any risk premium. The most logical consequence of this situation is a bigger commodity risk premium – investors should therefore expect to be compensated more for taking this risk through their carry. Yet, is this the case?

The combination of heightened commodities risk and the nature of this recent shock to commodities – a supply shock – has led to an increase in the usual carry for commodities. The disruption of supply has resulted in a significant part of the price increase taking place at the short end of the futures curve. For example, during 2022 the first futures contract for West Texas Intermediate (WTI) rose from $71 to $107 (reaching as high as $120), while the sixth contract only rose from $69 to $98 per barrel, i.e., an increase differential of 12%.  This phenomenon is not limited to the oil market but has spread to a very large number of commodities, as shown in Chart 2. Our analysis over the period 1990-2022 shows that 80% of commodity markets are currently in backwardation (when the current price of the underlying asset is higher than the price in the futures market), with a carry of around 10%. This level of carry may only have been exceeded 3% of the time during the period covered, but the percentage of the market in backwardation has been unprecedented. In our view, the carry of the asset class has largely aligned with the risk attached to it this year, suggesting commodities investors should continue to be rewarded for their exposure, this time through the increased carry associated with it. In a nutshell: the story of commodities is far from over, at least that is what market pricing seems to indicate.


Chart 2. Percentage of commodity markets in backwardation


Source: LOIM. Bloomberg. 1900-2022


Simply put, the recent increased risk for commodity markets is reflected in the term structure of futures; the resulting increase in carry should benefit commodity investors.




Macro/Nowcasting Corner

The most recent evolution of our proprietary nowcasting indicators for world growth, world inflation surprises and world monetary policy surprises are designed to keep track of the latest macro drivers making markets tick. Along with it, we wrap up the macro news of the week.

On the macro front, the news flow coming from Europe and China has been muted. In the US, the statistics are unanimous: US growth is strong. Private economists are now expecting 2022 growth to reach 3.2%, a high number given its recent range. The Federal Reserve Bank of Philadelphia’s outlook survey was 17.6 versus 21.4 expected and 27.4 in March: while it declined, this drop remained consistent with high growth. The leading index also fell from its highs of 2021 but pointed to a US economy on track with its potential at least (about 1.8%). This week’s housing data also showed signs of strength: housing starts remained strong while new home sales were still on an expanding path. The combination of all of these elements explains the growing confidence of the Federal Reserve in asserting its hawkish monetary policy. Not only are economic data strong: surprise indices for the US economy are positive and higher than their level at the end of 2019. This may come as a surprise to those discounting the negative impact from the combined commodity and monetary policy shock. The future of US growth keeps on dividing economists as charted below: when looking at the pool of economists forming the consensus available on Bloomberg, the spread between the minimum and maximum forecasts has progressively widened throughout the year. Interestingly, even the lowest of these forecasts (0.3%) currently does not foresee a recession: 2022 could be the first soft landing ever engineered by central banks.

Factoring in these new data points, our nowcasting indicators currently point to:

  • Still solid worldwide growth. The US and the Eurozone are showing solid numbers, while China remains set on a deteriorating path.
  • Inflation surprises should remain positive, but our signals have shown a recent decline. This decline follows the recent moderation of commodity prices, but not just this: 70% of the data constituting our inflation gauge is now declining.
  • Monetary policy is set to remain on the hawkish side, mirroring the strength of activity .


World growth nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Growth nowcaster-26Apr-01.svg

World inflation nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Inflation nowcaster-26Apr-01.svg

World monetary policy nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Monetary Policy nowcaster-26Apr-01.svg

Reading note: LOIM’s nowcasting indicator gathers economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

informations importantes.

À l’usage des investisseurs professionnels uniquement
Le présent document a été publié par Lombard Odier Funds (Europe) S.A., société anonyme (SA) de droit luxembourgeois, ayant son siège social sis 291, route d’Arlon, 1150 Luxembourg, agréée et réglementée par la CSSF en tant que Société de gestion au sens de la directive 2009/65/CE, telle que modifiée, et au sens de la directive 2011/61/UE sur les gestionnaires de fonds d’investissement alternatifs (directive GFIA). La Société de gestion a pour objet la création, la promotion, l’administration, la gestion et la commercialisation d’OPCVM luxembourgeois et étrangers, de fonds d’investissement alternatifs (« FIA ») et d’autres fonds réglementés, d’organismes de placement collectif ou d’autres véhicules d’investissement, ainsi que l’offre de services de gestion de portefeuille et de conseil en investissement.
Lombard Odier Investment Managers (« LOIM ») est un nom commercial.
Ce document est fourni à titre d’information uniquement et ne constitue pas une offre ou une recommandation d’acquérir ou de vendre un titre ou un service quelconque. Il n’est pas destiné à être distribué, publié ou utilisé dans une quelconque juridiction où une telle distribution, publication ou utilisation serait illégale. Ce document ne contient pas de recommandations ou de conseils personnalisés et n’est pas destiné à remplacer un quelconque conseil professionnel sur l’investissement dans des produits financiers. Avant de conclure une transaction, l’investisseur doit examiner avec soin si celle-ci est adaptée à sa situation personnelle et, si besoin, obtenir des conseils professionnels indépendants au sujet des risques, ainsi que des conséquences juridiques, réglementaires, financières, fiscales ou comptables. Ce document est la propriété de LOIM et est adressé à son destinataire pour son usage personnel exclusivement. Il ne peut être reproduit (en totalité ou en partie), transmis, modifié ou utilisé dans un autre but sans l’accord écrit préalable de LOIM. Ce document contient les opinions de LOIM, à la date de publication.
Ni ce document ni aucune copie de ce dernier ne peuvent être envoyés, emmenés ou distribués aux États-Unis, dans l’un de leurs territoires, possessions ou zones soumises à leur juridiction, ni à une personne américaine ou dans l’intérêt d’une telle personne. À cet effet, l’expression « Personne américaine » désigne tout citoyen, ressortissant ou résident des États-Unis d’Amérique, toute association organisée ou existant dans tout État, territoire ou possession des États-Unis d’Amérique, toute société organisée en vertu des lois des États-Unis ou d’un État, d’un territoire ou d’une possession des États-Unis, ou toute succession ou trust soumis dont le revenu est imposable aux États-Unis, qu’en soit l’origine.
Source des chiffres : sauf mention contraire, les chiffres sont fournis par LOIM.
Bien que certaines informations aient été obtenues auprès de sources publiques réputées fiables, sans vérification indépendante, nous ne pouvons garantir leur exactitude ni l’exhaustivité de toutes les informations disponibles auprès de sources publiques.
Les avis et opinions sont exprimés à titre indicatif uniquement et ne constituent pas une recommandation de LOIM pour l’achat, la vente ou la détention de quelque titre que ce soit. Les avis et opinions sont donnés en date de cette présentation et sont susceptibles de changer. Ils ne devraient pas être interprétés comme des conseils en investissement.
Aucune partie de ce document ne saurait être (i) copiée, photocopiée ou reproduite sous quelque forme et par quelque moyen que ce soit, ou (ii) distribuée à toute personne autre qu’un employé, cadre, administrateur ou agent autorisé du destinataire sans l’accord préalable de Lombard Odier Funds (Europe) S.A. Au Luxembourg, ce document est utilisé à des fins marketing et a été approuvé par Lombard Odier Funds (Europe) S.A., qui est autorisée et réglementée par la CSSF.
© 2022 Lombard Odier IM. Tous droits réservés.