The strong inflation tailwind that supported commodities in 2021 has bled into 2022, as the S&P GSCI started the year on the front foot, up 11.6% in January. In contrast, the S&P 500^® fell 5.2% over the same period. Inflation has traditionally helped commodity markets. Commodities have also historically been a good hedge against inflation. Low inventories and robust global GDP growth, combined with continued supply bottlenecks, have been supportive for commodity prices. On the downside, tighter monetary policy (i.e., a less accommodating U.S. Fed) could strengthen the U.S. dollar and create headwinds for commodities prices as the year goes on.

The S&P GSCI Energy was up 18.4% over the month. Brent oil surged above USD 90 per barrel for the first time in seven years, as investor appetite for inflation-sensitive assets remained elevated and the market agonized over Russia-Ukraine tensions. Global oil inventories are at tank bottoms and geopolitical risks have exacerbated the current imbalance. On paper, OPEC+ is still planning to bring back 400,000 barrels per day (BPD) of production each month between now and September, but in reality, the production increases are forecast to be closer to 200-250,000 BPD each month due to underproduction and underperformance across several member countries. Global natural gas markets also continue to be roiled by geopolitical tensions. The S&P GSCI Natural Gas rallied 40.5% in January. Escalating tensions between the West and Russia over Ukraine raised concerns about Russian gas flows to Europe, prompting the European Commission and the U.S. to investigate alternative supplies.

Meanwhile, the green energy transition is not fading. Many commodities will continue to benefit from incremental demand, while other commodities, such as oil, will likely suffer from low investment. Aluminum and nickel led the S&P GSCI Industrial Metals up 2.6% over the month; both are metals that will continue to benefit from the move to more sustainable energy sources.

After 2021 showed the largest drop in six years, gold prices were down a further 1.9% in January, a relatively admirable performance compared with many other assets. The S&P GSCI Palladium was one of the best performers across the commodities complex in January, up 23.2%. Tensions between Russia and the West over Ukraine have heightened concerns over supplies of the metal used in catalytic converters.

Across the grains complex, corn and soybeans were supported by dryness concerns in South America, which has the potential to boost demand for U.S. crops later in the current crop year. Despite the fact that forecasts of global wheat supplies have risen, the risk of supplies being disrupted by the Russia-Ukraine standoff remain elevated. The S&P GSCI Agriculture ended the month 4.4% higher.

The S&P GSCI Livestock was up 1.9% over the month. A rally in lean hog prices was attributed to a slowdown in hog slaughter and robust demand in the U.S., as consumers return to the office and are eating away from home. The S&P GSCI Lean Hogs rallied 8.0% over the month.