Why the Retreat in Commodity Prices May Last a While Longer

Higher costs driven by natural gas and smaller fertilizer applications could have a big impact on crop yields for the harvest season.

Julia Kochetova/Bloomberg

The pullback in most commodities in July, with wheat and oil among the decliners, might be an indication that inflation will soon reach its peak, and some commodities could be in store for further losses for the rest of this year.

Commodities look to post a second straight monthly loss following six consecutive months of gains. The S&P Goldman Sachs Commodity index has lost nearly 5% this month as of July 26, but remains more than 20% higher this year.

High inflation and monetary tightening are finally hitting consumer and industrial demand, which is “resulting in some demand destruction for most commodities and alleviating some of the upward pressure on prices,” says Matthew Sherwood, senior lead commodities analyst at the Economist Intelligence Unit. Most commodities prices are likely to “ease gradually for the rest of this year and next.”

Among the decliners, the S&P GSCI Industrial Metals index lost more than 4% in July, with Comex copper off almost 9% and iron ore down more than 18%. Iron ore and copper have been depressed due to weak economic activity associated with China’s zero-Covid strategy, says Shawn Reynolds, portfolio manager for VanEck’s active Natural Resources Equity Strategy.

Still, Reynolds says China and these metals prices are like a “coiled spring.” China has been providing “extensive stimulus measures on both the fiscal and monetary side.” That suggests a potential rise in demand for the metals.

The S&P GSCI Agricultural index has lost over 6% month to date, with wheat futures down over 9%.

Wheat prices hit decade-high levels after the Russian invasion of Ukraine in late February, coinciding with poor weather during the early part of the U.S. planting season, says Reynolds. A recent export agreement comes just as weather has turned positive for crops, he says.

Russia and Ukraine signed deals with Turkey and the United Nations that may clear the way for agricultural exports from both nations.

Still, “we see [Russian President Vladimir] Putin treating wheat and other ag products similarly to the way he is toying with Europe on the natural-gas front,” says Reynolds. Some of the big concerns include higher costs driven by natural gas and smaller fertilizer applications, which “could have a major impact on crop yields for the upcoming harvest season.” Russia is a major fertilizer producer, and the war in Ukraine disrupted global supplies.

Meanwhile, the S&P GSCI Energy index has also fallen by more than 5% in July, with global Brent crude losing over 7%. U.S. natural gas, however, is trading more than 60% higher for the month as hot weather boosts demand and Russia has cut supply to Europe.


There’s a disconnect between oil futures and physical oil markets. Futures investors are worried about the global economic slowdown and its demand impact, while those trading physical volumes face a very tight supply market, says Sherwood. He sees “extreme volatility,” but largely within a forecast range of $100 to $120 a barrel.

The physical market could fall back into a deficit over the rest of the summer, pulling prices higher, but a global economic slowdown would see prices begin to fall more significantly in 2023, he says. Sherwood expects most commodities prices to ease from current levels.

Reynolds, meanwhile, acknowledges demand risks associated with a potential recession, but believes that supply will continue to moderate as “recession risks encourage further capital discipline.”

Gold will strengthen as “concern over prolonged mild inflation sends investors looking for a store of value.” Natural gas, crude oil, and diesel are likely to perform well for the rest of this year and 2023, says Reynolds.

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