Falling commodity prices raise hopes that inflation has peaked

Natural-gas prices shot up more than 60% before falling back to close the quarter 3.9% lower. U.S. crude slipped from highs above $120 a barrel to end around $106. Wheat, corn and soybeans all wound up cheaper than they were at the end of March. Cotton unraveled, losing more than a third of its price since early May. Benchmark prices for building materials copper and lumber dropped 22% and 31%, respectively, while a basket of industrial metals that trade in London had its worst quarter since the 2008 financial crisis.

Many raw materials remain historically high-price, to be sure. And there are matters of supply and demand behind the declines, from a fire at a Texas gas-export terminal to better crop-growing weather. Yet some investors are starting to view the reversals as a sign that the Federal Reserve’s efforts to slow the economy are reducing demand.

“Moderating commodity prices are clear evidence that inflation is cooling," said Louis Navellier, chief investment officer at Reno, Nev., money manager Navellier & Associates.

Commodities have garnered extra interest on Wall Street, where investors are eyeing volatile raw-material markets to gauge inflation and have been investing in them to counteract the effect of rising prices on the rest of their portfolios.

Shares of commodity firms were among the few havens for investors during stocks’ worst first half in decades. Though they have slumped from highs notched earlier in the quarter, oil producers Exxon Mobil Corp. and Occidental Petroleum Corp. ended the first half up 40% and 103%, respectively. Fertilizer maker Mosaic Co. gained 20%. Grain trader Archer Daniels Midland Co. added 15%.

Investors this week will parse minutes from the Fed’s June 14-15 meeting, which are scheduled to be released Wednesday, seeking clues about the pace of interest-rate increases for the remainder of the year. The Fed is trying to tame the highest inflation since the early 1980s by reducing demand without tipping the economy into recession.

Traders and analysts say that some of the decline in commodity prices can be traced to the retreat of investors who piled into markets for fuel, metals and crops to hedge against inflation. JPMorgan Chase & Co. commodity strategist Tracey Allen said about $15 billion moved out of commodity futures markets during the week ended June 24. It was the fourth straight week of outflows and brought to about $125 billion the total that has been pulled from commodities this year, a seasonal record that tops even the exodus in 2020 as economies closed.

“I don’t know if the policies of the Fed have slowed the economy, but that’s what money managers are betting on," said Craig Turner, commodities broker at StoneX Group Inc.

Much of the climb in prices was due to supply constraints following pandemic lockdowns, weather events last year that reduced harvests and sapped fuel reserves, and war in Europe. Those pressures have eased, though supply shocks are still jolting prices.

The Energy Information Administration said last week that U.S. oil output averaged 12.1 million barrels a day during the week ended June 24, the most since April 2020 when the economy was locking down and producers were shutting in wells.

Damage from a fire last month at one of the country’s largest exporters of liquefied natural gas has left more of the power-generation fuel and manufacturing feedstock for the domestic market and eased fears of winter shortages. Natural-gas inventories in the Lower 48 states are 12.5% below the five-year average for this time of year, down from a deficit of roughly 17% in March, the EIA said.

Improved growing weather in the U.S., Europe and Australia is raising hopes that bumper crops can make up for the wheat, corn and vegetable oil stranded in Ukraine since Russia invaded. Grain and oilseed prices shot up after the incursion but have fallen back to or below where they were before the late-February attack.

Higher mortgage rates have cooled the market for new homes and popped the pandemic lumber bubble. Meanwhile, coronavirus lockdowns in China and a shift in U.S. consumer spending from goods to services, such as travel and entertainment, have dimmed the outlook for cotton and copper demand.

Despite the pullbacks, some still see commodities as a safe bet amid a bad year for stocks and bonds.

JPMorgan analysts say inventories around the world remain low and suggest buying agricultural futures. They expect a basket of commodities to return 10% by the end of summer and 5% by year-end.

Mr. Navellier said he is holding shares of oil drillers, shippers, fertilizer makers and chicken producers. “I know prices have peaked, but prices are elevated," he said. “I’m going into second-quarter earnings locked and loaded."