Commodities Rebound in Third Quarter

Sept. 29, 2017 11:55 p.m. ET

DJ Commodity Index

A key performance gauge for the commodities sector logged its first quarterly climb of the year, putting it on track for its second consecutive yearly gain, with energy and metals posting the biggest increases. Some of these sectors should continue their rise in the final quarter.

The S&P GSCI Index, which tracks 24 commodities, rose 7.5% for the third quarter as of Thursday, after falling 6.5% in the first half. “There was a clear split between winners and losers this quarter, with economically sensitive energy and metals coming out ahead of agriculture and livestock,” says Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices.

The energy sector, particularly gasoil, heating oil, gasoline, and crude oil, was the quarter’s standout.

Gasoil, a fuel used in machinery, suffered from hurricane-related disruptions. The S&P GSCI Gasoil Index rose nearly 25% for the quarter. “Inventories didn’t get restocked,” says Gunzberg. The fuel is a top performer “from its strong fundamentals of low supply and high demand,” and prices are “likely to rise as the hurricane disturbed the usual September restocking window. The same supply and transportation issues may support oil and gasoline for some time.”

The S&P GSCI Heating Oil Index climbed 23% for the quarter, while the Brent crude index rose 17%. The market saw better compliance among producers participating in the Organization of Petroleum Exporting Countries-led crude-oil output-cut agreement, and the Hurricane Harvey effects in late August on petroleum-product transportation prompted a sharp rise in gas prices, says Gunzberg. “Solid demand growth and OPEC production constraints have helped the oil market get supply and demand more in balance,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. He remains “cautious” on oil because these higher prices are likely to “result in a rebound in U.S. energy investment and production growth.”

Metals were also mainly higher for the quarter. The S&P GSCI Zinc Index climbed 14%, outpacing the gold index, which rose nearly 4%. Aluminum gained more than 10%. “China is the world’s biggest producer of aluminum, and between overcapacity and cuts in production over the winter months earlier this year”—in order to reduce air pollution—“supply has become a problem, pushing prices up through the third quarter,” says Adam Koos, president of Libertas Wealth Management Group. “Governmental policies and the cost of energy may continue to push prices higher from here,” he adds.

Gold, meanwhile, has benefited from the dollar’s decline, which could continue. “Gold rose over the past few months because the dollar was dropping,” says Brien Lundin, editor of Gold Newsletter, pointing out that “the two have been mirroring each other quite closely all year long.”

AMONG BIG DECLINERS, lean hogs suffered the most, with the S&P GSCI Lean Hogs Index off more than 30%. “Hog supplies are seasonally increasing, with weights trending above year-ago levels,” says David Maloni, president of the American Restaurant Association, a food and energy commodity-services organization. “This has pushed hog prices downward,” and supplies should “remain fairly ample through the fall.” Wheat also sharply fell for the quarter, with the S&P GSCI Wheat Index off 13.5%. Prices backed off during the summer following “spring wheat-crop concerns induced by drought in the Northern Plains,” says Maloni. “World wheat supplies remain fairly ample, but a [smaller-than-expected] spring crop in the U.S. and in Canada, along with a sharply smaller pending crop in Australia, could underpin wheat prices this fall.”

Overall for the third quarter, at least, commodity returns were “very solid,” but “this shouldn’t be interpreted as an all-clear sign” for the sector, says U.S. Bank’s Haworth. Year to date, the S&P GSCI Index has climbed by a not-so-impressive 0.5%, after a nearly 28% jump last year. 

MYRA P. SAEFONG is a commodities writer for MarketWatch.

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