Yes A checkmark with a circle around it close
Oil refinery with many barrels of oil

March 29, 2022

John LaForge, Head of Real Asset Strategy

Q &A on the price of oil and other commodities

Russia’s invasion of Ukraine has shaken the global markets and economy in more ways than we can yet see. According to John LaForge, head of Real Asset Strategy for Wells Fargo Investment Institute (WFII), it could take months — perhaps years — before consumers and investors may experience the full impact that the Russia-Ukraine war will have on commodity prices.

The large size of commodity production in the region may continue to aggravate inflation around the world, WFII warned in a recent Institute Alert. Energy and food production, in particular, may likely affect European countries, including the U.S.

As oil prices continue to rise in the U.S., John explains the impact the war may have on the economy and other commodities.

  1. Why is the price of oil — not just gas — important, and how does it affect consumers?
    Oil is important because most energy costs can be linked back to it in some form or fashion. The gasoline we pay at the pump, the heating oil in our homes, and even everyday products — like shaving cream and deodorants — are often made from oil. If you look around the room you are in today, mostly everything was either made from oil, processed with oil, or transported by using oil. Today, roughly 4% of the average American’s disposable income is spent on energy.
  2. What impact could the U.S. ban on Russian oil have on the economy?
    Quite a bit. Russia produces 11.3 million barrels of oil per day, which is roughly 11% of world consumption. The other major oil producing countries, unfortunately, do not have enough extra supply to fill the gap should Russian oil not be exported or bought. The rest of the world has extra capacity somewhere in the six to eight million barrels per day range, and it is not always available. The U.S., in particular, has limited extra supply as investors are leaning on energy producers to remain disciplined, particularly in the face heightened anti-fossil fuel policies. Should Russian oil be banned or not bought, oil prices will very likely rise until added supply is found, which could take months, if not years.
  3. What should investors do as the price of oil continues to increase?
    If you’re worried about the effects of rising commodity prices on an investment portfolio, we recommend an allocation to commodities. Since March 2020, we’ve recommended investors with higher risk tolerances add commodities to their portfolios. Here is what we recommend in the short-term (six to 18 months), which we call a tactical timeframe, and what we recommend over the long-term (10+ years), which we call strategic:
    • Short-term: We are Neutral on commodities. Neutral means these investors should own a full commodity position. What percentage exactly depends on a client’s financial plan.
      We were tactically Favorable on commodities since March 2020, until March 10 2022, when we downgraded commodities to Neutral. The reason is that commodity prices have increased markedly over the last few months, particularly around the news of Russia invading Ukraine. Should prices settle down and return to levels supported by long-run supply/demand balances, we may return our short-term tactical call to Favorable.
    • Long-term: We are Favorable on commodities. Favorable means that investors with commodity allocations may take on a larger than normal position, as we feel commodity prices are set to keep rising for years to come. As for which commodities to invest in, a broad basket is ideal for most investors, as individual commodities tend to move together, like a family, through time.
  4. In addition to oil, what other commodities may be impacted as a result of the Russia-Ukraine war, and why?
    Grains prices, particularly, could be impacted by the Russia-Ukraine war. Nearly 25% of wheat and corn exports come from these two countries. On top of that, Russia is a major fertilizer exporter. With Russia recently disclosing that it will hold back fertilizer exports, the world should be bracing for higher food prices in 2022, and possibly into 2023.

Risk Considerations

All investments are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors due to numerous factors some of which may be unpredictable. Be sure your clients understand and are able to bear the associated market, liquidity, credit, yield fluctuation and other risks involved in an investment in a particular strategy.

Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.