google-play

Scan to Download iOS&Android APP


Best commodities investments: will demand continue in 2022?

By  Yoke Wong

Edited by Vanessa Kintu

20:00, 23 December 2021

Share this article
Tags

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
Forex, Commodities, Equities, Fixed Income and Emerging Markets: the charts and summary info show about
Best commodities investments: will demand continue in 2022? – Photo: Shutterstock

Commodities are set to be the best performing asset class in 2021 amid record high prices, but will rising interest rates next year rein in the momentum?

The US Federal Reserve (Fed) said on 15 December that it would “reduce the monthly pace of its net asset purchases by $20bn for Treasury securities and $10bn for agency mortgage-backed securities”. 

The speed-up in tapering signalled steeper interest rate hikes over the next two years, which are likely to boost the US dollar, making dollar-denominated commodities trades more expensive and increasing the costs of financing. 

In addition, a stronger US dollar may divert commodity investments into the currency, which is also a safe-haven asset.

Despite the change in macroeconomic conditions, with higher interest rates expected in the US, ING bank’s head of commodities strategy, Warren Patterson, remains confident of strong performances in the commodities market with “some marginal downside risks across the complex in 2022”.

“[Commodities] markets exceeded our expectations [in 2021]. And 2022 looks to be another great year. While we see some prices edging lower from their current elevated levels, we expect most to remain above their long-term averages,” added Patterson. 

Despite all the optimism, the coronavirus pandemic remains a risk for the global commodities market.

Are you interested in learning what experts say are likely to be the best commodities to invest in? Ahead of the new year, let’s look at the top-performing commodities in 2021 and analyse the market outlook for 2022.

Commodities are split into four main categories: energy, metals, agricultural crops and livestock. This article will analyse the first three categories to highlight the key market trends for what commodities to buy and to trade.

Energy

Energy commodities include crude oil, natural gas, gasoline (petrol) and coal. Crude oil price is the key indicator for the energy market, which has been hitting headlines in 2021 for reaching multi-year highs amid supply tightness.

The US crude oil benchmark West Texas Intermediate (WTI) February contract traded on the New York Mercantile Exchange (NYMEX) hit seven-year highs and surged past $80 a barrel in October. The February WTI contract peaked at $81.89 on 26 October before falling but remained around seven-year highs and last settled at $70.83 at the time of writing on 23 December.    

WTI price chart]

Despite rising production from the Organisation of the Petroleum Exporting Countries and its allies, including Russia (OPEC+), ING expects oil prices to be supported by a lack of investment in upstream production.

At the OPEC meeting on 4 November, members and non-members reaffirmed their agreement to raise monthly overall oil output by 0.4 million barrels per day in December. 

“Oil is set to see strong supply growth from non-OPEC nations, which coupled with a further easing in OPEC+ supply cuts should push the global oil market back into surplus. This should put a cap on prices. However, worries over OPEC capacity and the broader lack of investment in upstream production will likely also provide a floor to the market not too far below current levels,” said ING.

Soft commodities

Soft commodities consist of perishable agricultural products such as wheat, sugar, soybean, cocoa, coffee, cotton and orange juice.

La Niña weather conditions are expected to affect production in Brazil – one of the world largest agricultural producers in the world – in 2021 and 2022. Brazil is the world’s largest producer of sugar, coffee and soybean.

Coffee production in Brazil has been particularly hit hard by the extreme weather conditions in the country, which experienced droughts followed by frosts. Wet weather conditions also affected coffee crops in Colombia, the second largest producer of arabica beans.

According to data from the International Coffee Organization (ICO), green coffee bean exports from Brazil fell to 3.62 million bags in October, down 12% from the same month last year. Exports from Colombia also decreased by 10.8% year on year to 1.07 million bags in October. The overall global green coffee exports in the first month of the coffee year 2021/2022 dropped by 6.1% year on year to 8.51 million bags.

Oil - Crude

81.05 Price
-0.390% 1D Chg, %
Long position overnight fee 0.0240%
Short position overnight fee -0.0439%
Overnight fee time 21:00 (UTC)
Spread 0.03

US100

11,229.70 Price
+0.480% 1D Chg, %
Long position overnight fee -0.0141%
Short position overnight fee 0.0041%
Overnight fee time 21:00 (UTC)
Spread 1.5

Natural Gas

6.95 Price
-0.130% 1D Chg, %
Long position overnight fee -0.1297%
Short position overnight fee 0.0928%
Overnight fee time 21:00 (UTC)
Spread 0.005

XRP/USD

0.49 Price
+1.860% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 0.00600

The supply shortage caused coffee prices to spike to a 10-year high in 2021. The 22 March Arabica coffee futures contract traded on the Intercontinental Exchange (ICE) hit a 10-year high at $2.4985 a pound on 6 December. Although prices have since dropped to $2.3355 on 22 December, it remained around the 10-year high level and nearly doubled in value from the beginning of the year.

“The coffee market has already suffered from drought and frost damage. How much of an impact this will have on next season’s crop will depend on precipitation over the rainy season. Given the uncertainty, coffee prices are likely to remain elevated until the market gets a better idea of how big Brazil’s next crop will be,” said ING. 

Metals

Metal commodities include ferrous (steel) and non-ferrous (base and minor metals). Base metals form the biggest metal market by trade volume and include copper, aluminium, zinc, lead, nickel and tin.

Copper is the bellwether metal of the global economy and is a key material for electrical components, whether it be for domestic wiring or industrial installations. The global green energy transition has boosted copper demand for everything from wind turbines to electric vehicles. This, coupled with recovering demand as countries eased restrictions after Covid lockdowns, has pushed copper prices to record highs this year.

“Inventories are low amongst several metals, whilst sentiment around the outlook for demand in the medium term is constructive due to growing investments in green projects, which happen to be metal intensive,” said ING.

The London Metal Exchange (LME) copper prices have surged past $10,000 a metric tonne in May, an all-time high. Although prices have since fallen from the peak and the benchmark three-month contract last settled at $9,620.00 a tonne at the time of writing on 23 December, copper prices have gained more than 20% from the beginning of this year. 

Copper price chart

In addition to copper, aluminium prices also hit a decade high at $3,200 a tonne on 18 October on supply tightness. Although prices have since fallen and were at $2,810.50 on 23 December, it remained near the 10-year high level and was up by more than 40% from the beginning of the year.

Aluminium price chart

“We are most bullish about aluminium going into next year. The aluminium market is heading into a period of structural deficits and there is no quick fix to resolve this; we should see prices trading higher,” said ING.

Precious metals

Precious metal commodities include gold, silver, platinum and palladium.

Gold is often featured heavily in investment portfolios as the precious metal is an inflationary hedge and a safe-haven asset. Safe-haven assets such as gold tend to fall in value when interest rates are higher, as higher interest rates can lead to a stronger US dollar and better returns from other investment products.

With the anticipation of an interest rate hike next year, fund managers cut their exposure across five metals contracts last week, with the biggest sell-off in gold and silver, according to Ole Hansen, head of commodity strategy at Danish bank Saxo Markets.

“Precious metals are likely to struggle the most over 2022. Tightening from central banks around the world, along with expectations of further USD strength, should mean investment demand for gold remains poor. The only scenario where we see further upside for gold prices is if we see central banks doing a U-turn on tightening. A potential catalyst for this would be further severe waves of Covid-19,” said ING.

According to LBMA data, spot gold prices hit a record high at $2,061.50 an ounce on 7 August this year amid an accelerating rate of inflation. Although prices have since fallen to $1,784.30 on 22 December, they remain at around a 10-year high, and up 7.6% from the beginning of the year. 

Aluminium price chart

Top commodities companies in 2021

With several metal prices hitting record-highs this year, the commodity super-cycle is boosting mining companies’ profit margins and stock value. So which are the top commodities companies in 2021?

Washington-based business forecasts and financial advisor Kiplinger published a list of commodities companies that have benefited from booming demand this year.

Kiplinger’s best commodity stocks for the coming boom]

Note that analyst forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.

FAQs

What are the best commodities to invest in?

The commodities market is driven by supply and demand. Commodities with demand outstripping supply will probably lead to higher prices and vice versa. Depending on your trading positions and portfolio composition, the best commodities to invest in are the one with expected supply shortages.

Which commodities will/can explode in 2022?

Analysts are expecting higher prices for soft commodities with supply disruption such as sugar, coffee etc. Metal prices are also expected to remain above their long-term average.

However, analysts’ forecasts can be wrong and have been inaccurate in the past. You should do your own research and never invest what you cannot afford to lose.

What is the best way to invest in commodities?

There are several ways to invest in commodities including futures, exchange-traded funds (ETFs), stocks etc.

What is the best way to invest in commodities will depend on your investing goals and portfolio composition. You should do your own research and never invest more than you can afford to lose.

Read more: Natural gas price forecast: Strong demand to lift US prices?

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?


Join the 450.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account

2. Make your first deposit

3. You’re all set. Start trading