Indices 2024 outlook: Global commodities | Insights | Bloomberg Professional Services (2024)

This article was written by Jim Wiederhold, Commodity Indices Product Manager at Bloomberg.

2021 and 2022 saw two stellar years for commodities, fueled by rising inflation, with the Bloomberg Commodity Index (BCOM) returning 27.1% and 16.1%, respectively. By contrast, 2023 saw the first negative performance for BCOM in three years, with a return of –7.9% amid cooling inflation and slowing economic growth. As we start the new year, we highlight six key themes to watch for the commodities in 2024:

1. Economic conditions in China will play a key role due to the country’s status as a top commodity importer, but the emergence of India as another heavy importer, increasing demand for commodities, will factor into the equation. If China’s demand cools, India will likely pick up the baton as global trade balances shift.
2. Geopolitical conflicts and global tensions have been bubbling up over the last two years, and this will likely continue into 2024. Commodities prices tend to move rapidly after the start of a conflict, as idiosyncratic events cause market participants to rapidly position themselves based on how they perceive these events will disrupt supply and demand factors.
3. The energy transition is expected to continue gaining traction over 2024, as there is increasing pressure on developed economies to move away from fossil fuels to an electrified economy.
4. Adverse weather events in 2023 were more frequently occurring, including an historic El Niño. These long-term meteorological patterns may have a dual impact on commodities in 2024 — first, with crop production, and second, with supply chain logistics.
5. The path of inflation, central bank policies and the direction of the US dollar will have prominent roles in the direction of commodities prices throughout the year.
6. Commodities futures curve structures will test one of the key bullish arguments for this decade’s commodity supercycle thesis, depending on the direction and shape of individual commodity curves.

India’s manufacturing PMI readings have been strongly in expansionary territory (above 50) over the past two years, while China released consistent readings in contractionary territory (below 50). China has historically been the biggest importer of commodities by a wide margin. In 2023, India’s population surpassed China as a significant landmark measure of growth. At this time, sentiment moved in favor of India with investment inflows, whereas China continued to see outflows. The steady cooling down of China’s growth reduced ‌demand for commodities. India’s last GDP reading north of 7% showed China’s neighbor exhibiting healthy demand and a strong, growing economy.

Market participants were bearish on Chinese equity markets, which finished 2023 in negative territory, while India’s equity market grew by 20%. India’s two largest commodities imports are crude oil and gold. Crude purchases are likely to still be strong in 2024 due to strong industrial demand, but Indian gold buyers, who are mainly retail investors, are highly sensitive to elevated prices and may wait for price dips to purchase.

The start of the Russia/Ukraine war in 2022 had a pronounced effect on commodities prices globally. Natural gas, nickel and wheat prices spiked that year. In 2023, we saw a mean reversion move, as prices corrected to the downside. At the end of 2023, the uncertain situation in the Middle East with the Gaza conflict spilled into attacks on ships in the Red Sea, disrupting shipping routes and boosting crude oil prices. These conflicts rattled commodities markets, and continued escalation could cause further gyrations in supply chains.

In these situations of rising tensions, precious metals tend to benefit in the short term. The world’s safe-haven asset, gold, hit an all-time high of $2,062 at the end of 2023. One major leading indicator, central bank buying, was as strong as it’s been in over a decade, and this action historically tends to precede rises in gold prices. Will 2024 be a good year for gold? If geopolitical conflicts continue and rage more aggressively, investors may look to gold to protect them, particularly as highly valued equity markets cool down.

An interesting dynamic concerning gold prices in 2023 was the break in the historical negative correlation to real yields. Typically, gold prices drop when real yields rise. This relationship broke down last year, as gold rose despite rising real yields over the past two years. As geopolitical and macroeconomic factors evolve during 2024, we should keep an eye on the usual historical negative correlation and how it plays out.

The United Nations COP 28 climate change conference in November 2024 proved to be historic, as it was the first time countries collectively agreed to transition away from fossil fuels. Some have taken the lead, such as Germany, which reported more than 50% of its power produced by renewable energy for the first time in December 2023. Besides the transition away from fossil fuels, a renewed focus on scaling metal supply — including nickel and rare earth metals needed for the electrification of the world economy — was seen in 2023 and will likely continue into 2024.

Relatively new metals futures markets for cobalt and lithium traded in increased volumes in 2023 and may gain even more traction in 2024 and beyond, as this headline objective takes course. Separately, uranium prices hit a 16-year high, as the political climate has pivoted toward nuclear power as a viable renewable energy alternative.

Not only was 2023 the hottest year on record globally, according to the World Meteorological Organization, but we also experienced an historic El Niño weather event. The 2023 El Niño could rank in the top five since 1950. Soft commodities such as cocoa, coffee and sugar posted solid performances in 2023, with weather conditions a key factor in production. With long crop cycles spanning several years, damage to crop supply from outsized weather-related events would be much more disruptive than for other faster-growing commodities, such as corn or soybeans.

Climate change has caused shipping delays at the Panama Canal due to low water levels at the end of 2023. Drought also created choke points on the Mississippi River in the US and the Rhine in Europe. Most grains and softs are shipped via maritime trade routes. Hence, we see weather as a dual factor for harvesting production and transportation regarding agricultural commodities.

Commodities are traditionally used to diversify portfolio allocation, as they are the most inflation-sensitive of the asset classes — moving significantly higher in prices when inflation rises, and vice versa when it cools. The question for 2024 is whether the aggressive central bank hiking cycles of the past two years have tamed this fiery inflation? Throughout the past year, public companies from across all sectors cited “rising costs” as challenging their margins in earning calls.

As shown in figure 5 on the bottom left side, a potential US recession would lower demand for most goods and services and, in turn, reduce demand for commodities. Furthermore, an additional headwind to crude oil prices would be production increases from countries outside OPEC+.

The start of the 2020 commodity supercycle coincided with several key catalysts for the commodities bull case. After the steep decline in economic activity at the start of the COVID-19 pandemic, government stimulus ignited economic growth in most developed nations. Demand increased, supply chain bottlenecks amplified, and inflation ramped up at one of the fastest paces in history.

This global supply/demand dynamic pushed most commodities futures curves into a state of backwardation, where near-dated futures contract prices are higher than prices of commodities futures later in time. In this environment, a long exposure in commodities provided a positive roll yield. The state of backwardation means that, even if commodities prices remained the same, an investor would be paid to hold onto this long position with a “roll yield.” Traditionally, most commodities markets tend to be in a state of contango due to the cost of storing barrels of oil, bushels of corn, and so forth. A long exposure in contangoed commodities experiences a negative roll yield.

Will the cost of holding long commodities exposure become negative in 2024? Time will tell, but to start this year, the crude oil futures curve is still in backwardation, similar to one year prior. Meanwhile, other major commodities like corn and copper futures have already flipped to contango, meaning the cost of holding a long exposure is higher when rolling a position.

In Figure 6, the orange lines show the most recent curve structure, and the green is the historical one-year-earlier view. Bloomberg offers roll yield-enhanced solutions that seek to invest in forward curves with minimal roll cost without sacrificing price sensitivity and liquidity constraints.

There’s much to debate in the outlook for commodities in 2024. In this blog, we examined the six key factors we believe will be the main drivers in the year ahead. First, we look east to China and India, to assess which superpower nation will lead the commodities demand charge. Commodities have always been sensitive to geopolitical (and political) events. As scenarios unfold, we’ll see the impact on commodities prices and potentially heightened volatility. The energy transition is a major topic and aligned to the goals agreed on at COP 28. This year, the potential for extreme weather situations has a two-pronged impact on commodities: production and supply chain delivery. From a macro perspective, inflation and commodities go hand in hand. The markets are expecting a much more certain central bank track; will commodities follow suit? Finally, we assessed the supply/demand dynamics on commodity forward curves moving from backwardation to contango with suitable solutions.

In this series of blogs, we look forward to engaging in the debate and hearing the arguments for whether commodities prices will be higher or lower in 2024.

Learn more about Bloomberg’s commodity index offerings.