Conflict, Climate and the Case for Commodity Diversification

The BCOM commodities basket has generated a 36% total return year-to-date. We continue to recommend a positive commodities allocation, both tactically and structurally, despite our base case that crude oil and European natural gas prices moderate as Mideast supply adapts. Tactically, three factors support long commodities positions as a portfolio hedge: we remain concerned that geopolitical escalation—such as intensified shipping attacks or damage to energy infrastructure—and, for European natural gas, a cold winter could push energy prices significantly higher; since the Iran war began, equity—and especially bond—prices have become unusually sensitive to energy prices, reflecting resilient global GDP growth and five years of above-target inflation;