The Commodity Bull Market Is Broadening | Jim Wiederhold on Copper, Grains, and Bloomberg Commodity Index

Jim Wiederhold analyzes the current commodity bull market, emphasizing the significant tailwinds from AI and macroeconomic factors that are driving prices higher. He highlights that rising business costs are particularly affecting energy commodities, which are essential for the production of other commodities. Wiederhold predicts that industrial metals, especially copper, will outperform precious metals due to strong demand linked to the energy transition and data center expansions.

He points out short-term inventory challenges for copper, worsened by supply constraints and weather-related disruptions. The energy landscape in Europe has shifted, with renewables now comprising over 50% of the mix, while China's move towards electric vehicles has decreased its oil imports amid geopolitical tensions. Despite expectations for increased mine production and new greenfield projects, Wiederhold cautions that these developments will take years to materialize.

Wiederhold notes that the U.S. renewable energy market will likely remain volatile until at least 2028, although the long-term outlook for renewables remains stable despite political hurdles. He highlights the significant demand for copper and silver from data centers, with silver's demand heavily influenced by its use in solar panels. The average solar panel's silver content was reported at 25% at the start of the year, a historically high level.

He observes a market trend where participants are shifting from silver back to gold, as less than half of silver production comes from dedicated silver mines, making supply responses to price increases less nimble. The Bloomberg Commodity Index has seen a 1% rise this year, with copper prices increasing over 15% due to strong global growth. Central bank purchases of gold, exceeding a thousand tons annually from 2022 to 2024, are viewed as a positive sign for future gold prices.

In agriculture, wheat prices have surged over 25% due to weather-related crop issues, while soybean oil has benefited from increased use in renewable fuel standards. Wiederhold notes a sector rotation in agricultural commodities after a bear market, with wheat, soybean oil, and soybeans emerging as top performers. He warns that rising fertilizer costs may lead farmers to cut back on usage, potentially affecting corn yields, although corn prices have remained stable.

Wiederhold concludes that broad exposure to commodities is likely to perform well, especially following increases in gold prices, and emphasizes the limited exposure that institutional and retail investors have to commodities compared to the overall market. He discusses the growing interest among institutions in commodities as a diversification strategy, noting that commodities are the most uncorrelated asset class, which has led to increased assets in ETFs tracking these commodities over the past year.

He highlights that commodities generally perform well in favorable macroeconomic conditions, but current geopolitical tensions and extreme weather events pose risks of supply disruptions, which could drive prices higher. The Bloomberg Commodity Index (BCOM) is noted for holding the majority of assets among commodity indices, while the Bloomberg Enhanced Roll Yield Index has outperformed BCOM by at least 4% annually over the last five years.

Wiederhold mentions that BCOM's energy weighting is capped at 30%, lower than some competing commodity ETFs. While individual commodities can be volatile, he suggests that broad exposure may yield a volatility profile similar to equities. He predicts that if the Strait of Hormuz remains closed, oil prices could surge significantly, potentially reaching between $150 and $300 per barrel, with a six-month closure possibly pushing prices to $200.

He also notes that China has reduced its oil inventory, leading to decreased imports and demand, while increased North American production and inventory usage have influenced the current oil market. The crack spread for refined products is currently higher than in 2022 due to a scarcity of refined products compared to crude oil, with Marathon Petroleum reporting a quarterly operating income of $7.3 billion. Wiederhold expresses skepticism about the long-term effectiveness of U.S. administration efforts to influence oil prices, suggesting that while such measures may have temporary effects, they are not sustainable solutions.