Often a firmer dollar will help to take commodities off the boil. It is therefore notable that this has not been the case in 2021. The Bloomberg Commodity Index continues to make new highs and is up +71.5% from the March 2020 low to the close of the third quarter.1
Energy prices were at the forefront of investors’ minds over the quarter as coal, liquified natural gas and power prices reached all-time highs, while the oil price reached levels not seen since 2014. This coincided with power rationing, blackouts and factory shutdowns occurring in China and Europe, with impacts on supply chains from food processing to transport of goods and fuel deliveries.
Tightness in energy markets does not appear to be going away any time soon. Governments have already been stepping in to deal with the issue. Spain announced a windfall tax on utilities and a cap on consumer bills. Similarly, Italian Prime Minister Mario Draghi announced that his government will subsidise consumers’ energy bills, having already spent €1.2 billion in the second quarter, which is estimated to have cut the consumer price increase to 9% from an initial 20%.2 A number of factors have contributed to the spike in energy prices, from supply-chain disruption, years of subdued capital expenditure and geopolitics, to the impact of the move to green energy sources.
Brendan Mulhern, global strategist and member of the Real Return team, Newton Investment Management.
Doc ID: 755929
1 Source: Bloomberg, 1 October 2021