Cracking the code: What influences commodities market prices

Have you noticed how your everyday expenses, from groceries to fuel, have been steadily climbing for the past three years? It's easy to feel like the commodities market is something distant, unrelated to your daily life. But what if we told you that you're more connected to it than you might think?

Consider this undeniable fact: the prices of essentials like milk, oil, tomatoes, and even detergent – things you rely on every day – are at record highs, and it's hitting your wallet hard. You might be gritting your teeth as you pay these escalating costs, but here's the thing: you don't have to be on the wrong side of the commodities market. 

Understanding what commodity prices are and what affects them is essential for anyone involved in the world of trading.

Let’s dive into the fundamental factors affecting this market!

Supply and demand

The most fundamental factor affecting commodities market prices is the balance between supply and demand. When demand for a particular commodity exceeds its supply, prices tend to rise, and vice versa. Weather conditions, geopolitical events, and technological advancements can all impact supply and demand.

For example, if we were to look at gold volatility and what factors influence demand, a significant increase in jewellery demand in India during the wedding season could lead to a surge in gold prices. Conversely, decreasing gold production due to labour strikes in a central mining region can reduce supply and drive higher prices.

Some of the world's major oil exporters, like Russia and Saudi Arabia, have previously cut their production and hence driven up the price of oil.

Weather and natural disasters

Agricultural commodities like grains and soft commodities such as coffee and cocoa are highly susceptible to weather conditions. Droughts, floods, hurricanes, and other natural disasters can devastate crops and disrupt supply chains, leading to price fluctuations.

In 2022, a drought in the United States and a heatwave in India reduced wheat production in both countries. This led to higher global wheat prices, as there was less wheat available to meet global demand. This meant the price of wheat-based products, such as bread, pasta, and cereal, rose around the world.

Geopolitical events

So, what other factors influence supply? Political instability, conflicts, and sanctions in major commodity-producing regions can disrupt the supply of commodities like oil, natural gas, and metals. This can cause sharp price spikes and increased market volatility.

If there is a war in a country that produces a commodity, the supply of that commodity may be disrupted, leading to higher prices. This example can be seen very clearly in the Russia-Ukraine war.

In the weeks following Russia's invasion of Ukraine on February 24, 2022, the price of crude oil rose over 50% to reach a 14-year high of over 130 USD per barrel. Natural gas prices in Europe also saw significant increases, reaching record-high levels.

The price of gold similarly experienced sharp gains after the escalation of the conflict, rising nearly 100 USD per ounce on the first day, February 24. In the subsequent weeks, gold prices continued to climb, reaching highs of around 2,070 USD per ounce in early March 2022. Market analysts noted that gold is often viewed as a safe haven asset during periods of geopolitical tensions and uncertainty.

Economic indicators

Economic data, such as GDP growth, employment figures, and consumer sentiment, can have a significant impact on commodities markets trading. Strong economic growth tends to increase demand for industrial commodities, while weak economic conditions can reduce demand.

But this is not always the case.

Strong GDP growth often indicates a robust economy with increased production and consumption. This can lead to greater demand for industrial commodities like metals and energy resources, which are essential for manufacturing and construction.

However, it should be noted that extreme economic growth may eventually lead to inflation, which sparks central banks to intervene by raising interest rates.

Higher interest rates can make holding gold less attractive because it doesn't provide any yield or interest. As a result, investors may prefer interest-bearing assets, and this can lead to a decrease in gold demand and price.

Currency exchange rates

Commodities are commonly priced in US dollars. There is often an inverse relationship between the strength of the USD and commodity prices, including gold. A stronger US dollar tends to drive gold prices lower, and vice versa. A weakening of the US dollar can make gold more attractive to international buyers because it becomes less expensive in other currencies. This can lead to increased demand for gold trading online and higher prices.

Developing a well-defined gold trading strategy is essential for navigating the complexities of the precious metals market.

Government policies and regulations

Government policies, such as tariffs, subsidies, and environmental regulations, can affect the production, import, and export of commodities. These policies can have a direct impact on supply and demand dynamics. If a government decides to subsidise the production of a commodity, this can lead to lower prices.

Technology and innovation

Advances in technology can impact the supply side of commodities markets. For example, improved drilling techniques in the oil industry can lead to increased production and lower prices.

As we can see, the commodities market is a complex interplay of fundamental factors. We might not be paying attention, but we can see the effects in our daily lives. Supply and demand dynamics, influenced by factors like weather, geopolitics, and economic conditions, form the foundation of commodity price movements.

However, it’s important to note that fundamental factors are not the only ones that affect commodities market rates. Speculative factors can also play a significant role. We’ll explore the speculative factors in another blog.

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Sign up for a free demo account to start exploring the commodities market. It comes preloaded with 10,000 USD virtual currency so that you can practise trading commodities online risk-free.