Understanding the Commodity Cycle

Written By

James Barra

Edited By

Jemma Grist

Fact Checked By

William Berg

Updated

Jan 7, 2026

When trading commodities, understanding the commodity cycle is arguably the most important element in determining their future direction. This article provides an overview of the commodity cycle framework and illustrates how it can inform outlooks.

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Commodity Cycle – Key Points

Commodities have historically been more volatile than major developed-market equities, FX, and intermediate-duration U.S. Treasuries. For example, using daily data from 2016–2025, a broad commodities proxy (GSG) showed higher annualized volatility than SPY, and several times the volatility of a broad US dollar index and intermediate Treasuries.
Commodities are more of a pure trading asset class than stocks and bonds, given they are not cash-producing or yield-generating assets, but can rather be thought of as alternative currencies subject to their own supply-and-demand forces.
All commodities go through cycles that are largely driven by the investment behavior of producers.
Identifying where each commodity is in its cycle, and ideally getting in at the start, is the key to trading them successfully.
This article uses a five-phase commodity cycle framework and illustrates how it would have informed views at specific points in time (including an example outlook written in January 2018).

Trading commodities is different from other asset classes in that they are predominantly pure alpha-type bets. When you invest in stocks, bonds, or in carry-related forex trading, you expect to capture a spread-related compensation concerning duration or interest rate differentials.

Namely, stocks, having no expiration (unlike most bonds) and being the most junior stakeholders in a company’s capital structure (therefore paid after bondholders in a hypothetical bankruptcy scenario), typically provide the highest return over the long run. This is expected, given that investors want to be compensated for taking on more risk.

Bonds provide returns commensurate with their duration (i.e., the further the bond is from expiry, the more investors expect to be compensated), interest rate risk, and credit risk.

Carry-related forex trading involves being long a higher-yielding currency against a lower-yielding currency and trying to profit off the spread between the two.

Physical commodities don’t pay income, but futures-based commodity exposure can earn returns from spot price changes, plus roll return and collateral return. Understanding where commodities should trade relies primarily on supply-and-demand analysis, rather than analysis of expected future cash flow performance, as in the case of stocks and bonds.

To understand how roll return can help or hurt returns, see CME Group’s primer on roll yield and CME Group’s explanation of contango and backwardation.

One can also think of commodities as alternative currencies; that is, something tangible that is commonly considered of value. A common example is gold, which historically has been a common backing for a nation’s currency. Therefore, commodities can also be considered a store of wealth.

But given that commodities are not cash-producing assets, trading them is thus largely driven by analysis of where price alone will move.

How is this done?

Well, it’s important to understand that all commodities go through an investment cycle. It roughly follows a five-step process.

The 5 Phases of the Commodity Cycle

In phase one, a surge in demand for the commodity-related input causes it to exceed its supply. When demand outstrips supply, prices rise. This surge in demand can relate to economic growth, a surge in innovation or new industrial usage (e.g., cobalt demand from some lithium-ion EV battery chemistries), or basic economics wherein low prices beget higher demand – and hence the old adage “low prices cure low prices.”
As prices start rising, more producers see their margins expand or at least have the capacity for them to expand. This incentivises larger amounts of capital spending to increase production. During this time, prices are keen to increase further. This helps to stimulate growth and inflation in the broader economy.
As capital expenditure ramps up, capacity is increased. This brings more supply onto the market. At the same time, higher prices begin to erode market demand. For a highly in-demand commodity, high prices will encourage substitution (e.g., battery chemistries shifting away from cobalt, such as LFP or other lower-cobalt designs, reducing cobalt demand) and undermine demand through alternative channels. Demand and supply begin to equilibrate, and prices start to stabilize.
The next phase begins once supply from new production overwhelms demand and prices begin to fall.
Once the reality of lower prices hits the market, capital expenditures must be curtailed (or discontinued entirely) to avoid producing unprofitably. This helps to drain supply from the market, creating a new equilibrium that becomes a cyclical bottom. Once this production capacity evaporates, this provides the basis for the supply constraints witnessed once the cycle turns back to stage one and repeats itself.

How This Template Applies to the Current Commodities Picture

Cycle length and amplitude vary widely by commodity; some markets can be relatively stable for long stretches, while others (including uranium) have experienced very large multi-year swings, which is reflected in the U.S. uranium transaction prices reported in the EIA Uranium Marketing Annual Report.

Example (January 2018): At that time, oil prices had rebounded, and Brent traded above ~$70/bbl, prompting discussion about rising investment and supply response. This is a historical example and not a current outlook. But this forthcoming supply-side increase and demand-side erosion that occurs as price rises puts oil much closer to its cyclical top than a cyclical bottom.

For those in oil trades currently, whether that means being long oil equities, oil bonds, or the commodity itself, now would be the time to begin reducing exposure. Generally speaking, the shift from phase III to phase IV of the commodity cycle is when one might look to reduce exposure.

Trades that have been going well tend to bring the sentiment that whatever we’re trading is a good investment. However, it often means that it’s getting more expensive.

Price Outlook for Various Commodities

Historical note: The following bullish/bearish list reflects one set of views written in January 2018 for the subsequent 18–24 months, included here as an illustration of applying the framework (not as a current forecast):

Bullish

Zinc
Lead
Alumina
Chrome
Gold (slightly)
Silver (slightly)

Up, then Down (expected inverted U-shape price trajectory over next 18-24 months)

Cobalt
Coal (both met and thermal)

Stable

Oil
Platinum
Steel
Nickel
Bauxite
Iron ore
Tin
Aluminum
Uranium
Palladium

Down, then Up (expected U-shape price trajectory over next 18-24 months)

Manganese

Bearish

Liquefied natural gas
US natural gas
Copper
Lithium

Conclusion

All commodities trade in cycles. Any given commodity cycle never flows perfectly as new information becomes available regarding innovations in production, evolving industrial uses, substitution effects, and price speculation from investors.

Across broad commodity benchmarks, individual commodities can sit at very different points in their cycles at the same time, so opportunities tend to be market-specific rather than uniform. We can still, nonetheless, find pockets of the market that may be worth trading if one has the conviction that the prospective returns are high enough.

Depending on the commodity benchmark and time window, the relative valuation of equity to commodity can appear elevated or depressed. If you want to make this claim, specify the exact series (e.g., Wilshire 5000 vs S&P GSCI), the date range, and show the ratio chart (preferably inflation-adjusted).

But this, naturally, is more of a consequence of stocks being historically expensive – due to years of low interest rates and central banks purchasing assets to support financial conditions – rather than commodities being cheap on their own.

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Disclosure: As of the time of writing, I am net long gold, and stocks and bonds involved in the business activities of oil production, exploration, and refining.