What Affects Commodity Prices?
Trading commodities can be highly volatile and unpredictable, with different types of commodities experiencing varying degrees of price fluctuations. Understanding their key drivers will improve your chances of trading success over time. Research what factors affect commodity prices and discover what to track below:
Key Factors That Drive Commodity Prices
What drives commodity prices?
Commodities are traded on exchanges, with the price of commodities influenced by several catalysts each day rather than a single source. These factors push and pull the same forces of supply and demand that control all financial markets. In most cases, this dynamic works as follows:
- Commodity prices rise with increased demand, such as rising natural gas consumption during winter heating seasons.
- Commodity prices fall with increased supply, for example, if the supply of commodities increases, such as excess crops after harvest.
Dynamics that affect supply and demand can be complex, interwoven, and unpredictable. Different commodities are also influenced by different factors, making targeted research essential after identifying tradable markets. Understanding the drivers of commodity prices is crucial whether you're dealing with energy commodities like crude oil, or soft commodities such as agricultural products.
Start by reading up on the key factors affecting commodity prices below.
Climate and weather events
Weather is a key driver of short-term price movements for agricultural commodities, which are products grown or raised on farmland.
Examples of agricultural commodities include coffee, cotton, and corn. Natural disasters and extreme weather patterns can create significant volatility in these markets, which affect the price of both soft commodities and agricultural products.
Poor or favourable weather in key production regions can dictate the quality and size of harvests, causing price increases or excess supply. Extreme weather events have the potential to destroy harvests altogether, severely restricting supply and rising prices.
Weather can affect other commodity markets too. For example, cold spells often drive increased demand for energy commodities, resulting in higher prices as a result.
Other production changes
Weather isn't the only influence on commodity production:
- Worker availability, strikes, and disagreements can disrupt production patterns, reducing supply.
- New technology and processes can enhance production, increasing supply.
- Similarly, competition such as new mines, plantations or oil fields can also increase supply, causing prices to fall if demand doesn't follow suit.
Economic health
Global and domestic economic health is also closely linked to the price of a commodity. In times of growth, a country's demand for commodities typically increases. Construction projects may rise, for example, driving demand for metals. This economic activity often drives commodity futures markets as traders anticipate future price changes, while high consumer spending power can grow demand for luxury goods.
Conversely, if an economy contracts, demand for certain commodities typically decreases. While many commodities are essential for living, businesses and consumers may choose cheaper options and/or smaller quantities.
Emerging markets
On a similar note, emerging market countries in particular can be key drivers of commodity demand and pricing. As the IMF explains, these are countries experiencing considerable growth while lacking (but aiming to acquire) certain characteristics of developed economies, contributing to higher international relevance and standards of living.
These growing nations can need certain commodities in great quantities to build infrastructure, fuel increased production, and feed their growing populations. Notable examples of emerging markets include India, China, Saudi Arabia, Mexico, and Brazil.
Geopolitical situations
The nature of commodity imports and exports means that geopolitical situations often have significant bearing on price movements. Production of many major commodities is concentrated in certain regions or countries, affecting crude oil prices and natural gas markets in the Middle East, so tensions and conflicts can heavily impact supply.
This is especially true when certain countries and regions impose sanctions on producing nations, as seen following Russia's invasion of Ukraine.
State and industry policies
State and industry intervention can also strategically boost or limit commodity supply. The Organization of the Petroleum Exporting Countries (OPEC), for example, has a track record of curtailing oil output, in part to strengthen demand and pricing.
Currency movements
Most commodities are priced in USD, meaning a rising or falling US dollar can also impact their value.
This is because currencies rise and fall relative to others – if the dollar increases in value against a buyer's domestic currency, commodities become more expensive, potentially reducing demand. Conversely, a falling dollar can make for cheaper commodities for overseas buyers, increasing demand.
Commodity competition
Commodity demand can also be vulnerable to competition from alternatives. If one type becomes too expensive, buyers may look for cheaper alternatives that can perform a similar job. A common example is manufacturers using aluminium as a substitute for the pricier copper.
Price isn't the only deciding factor though. It's hoped the rise of renewable energies will reduce demand for coal, oil, and gas, which the United Nations warns dominate global energy production at an unsustainable environmental cost.
Transport and storage
The logistics of transport and storage can also come into play in commodity markets. Disruptions to transport such as bad weather, closed routes, and drivers' strikes can all reduce immediate supply while lifting commodity prices at final destinations.
Crude oil and LNG tankers often serve as floating storage when oil and LNG are in oversupply. This practice reduces tanker availability for transport, raising shipping costs and potentially constraining the supply of other exported commodities.
Seasonality
The nature and applications of some commodities means that supply and demand can be seasonal too. For example:
- Energy demand typically rises in winter and falls in summer. Natural gas prices often experience seasonal volatility due to heating demand patterns.
- Gold prices can increase around festival and wedding seasons in certain countries.
- Agricultural crop supply revolves around harvest.
Investor sentiment
Finally, fellow investor and trader behaviour also has the power to influence commodity prices. Market participants all have access to the same news, data, and price charts, which can simultaneously guide their decisions and lead to mass buying or selling.
Analysing factors affecting commodity prices
Sound trading analysis can allow you to make sense of the factors we've described above and predict future price movements. There are two broad types you may want to conduct:
- Fundamental commodity trading analysis looks at the external factors influencing pricing, such as weather, economic health, and geopolitical situations.
- Technical trading analysis focuses on commodity price charts, seeking to identify patterns and predict future movements.
Combining elements of the two can give you a well-rounded understanding of what's happening in different markets.
Where to check commodity prices
It's possible to check commodity prices through the major commodity exchanges, including the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and the London Metal Exchange (LME). But a more convenient route for traders is checking the designated commodity market pages through our website or platform.
Now you know what affects commodity prices, broaden your knowledge with our other market guides.