Commodity prices can be highly volatile and unpredictable, but understanding their key drivers will improve your chances of trading success over time. Research what factors affect commodity prices to discover what to track below:
Commodities are traded on exchanges, with prices 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:
The drivers of these trends can be complex, interwoven, and unpredictable. Different commodities are also influenced by different factors, making targeted research essential after identifying tradable markets. Start by reading up on the overarching factors affecting commodity prices below.
Weather is a key driver of short-term price movements for agricultural commodities, which are products grown or raised on farmland. Major examples include coffee, cotton, and corn.
Poor or favourable weather in key production regions can dictate the quality and size of harvests, leading to short 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 though. Cold spells often drive increased demand for energy commodities, for example, pushing prices higher as a result.
Weather isn't the only influence on commodity production:
Global and domestic economic health is also closely linked to commodity prices. In times of growth, a country's demand for commodities typically increases. Construction projects may rise, for example, driving demand for metals, 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.
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.
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, such as crude oil 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 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.
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 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.
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 tankers meanwhile sometimes double as floating storage facilities when oil is in excess supply. But this reduces the availability of tankers for transportation, increasing shipping rates and potentially limiting supply of other exported goods.
The nature and applications of some commodities means that supply and demand can be seasonal too. For example:
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.
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:
Combining elements of the two can give you a well-rounded understanding of what's happening in different markets.
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.