If you want to get started trading commodities, you need to know what drives commodity prices. Supply and demand determine the direction of commodity prices. For example, if the supply of a commodity like copper increases, its price decreases. Likewise, if supply decreases, its price increases.

Let's look at some of the factors that influence supply and demand and cause commodity prices to fluctuate.

Physical Consumption

The use of commodities by producers and other consumers is one of the main factors that influences prices. For example, if buyers want to buy more aluminum and supplies are low, they will have to pay more. Conversely, if demand decreases and more aluminum comes into the market, sellers will have to lower their prices to attract buyers.

Changes in Production

Supply fluctuations have a major impact on commodity markets. If crops fail, or producers pump less oil, or mines have to cut back, the supply of those commodities on the market will decrease, causing prices to rise. Conversely, if a new plantation, oil field, or mine is discovered, the supply of those commodities on the market will increase, and their prices will fall if demand is not enough to balance the supply.

Currency Fluctuations

Most commodity markets are denominated in US dollars, so the value of the US currency affects commodity prices. If the US dollar rises against other currencies, commodities become more expensive for foreign buyers, who must convert their local currencies into dollars. This can reduce demand. If the dollar falls, commodities become cheaper for foreign buyers, which increases demand.

Geopolitical Environment

Commodity production is usually concentrated in certain countries or regions. Political events in these regions can affect the supply of commodities produced there. For example, the US-China trade war in 2018 affected the supply and demand for commodities. Western sanctions on Iran have reduced the supply of crude oil. And the conflict between Russia and Ukraine has disrupted grain supplies to the world market.

Economic Activity

The rate of economic growth in a country determines the demand for raw materials and other goods. As the economy grows, the purchasing power of the population increases and the demand for goods and services increases.

The rise of China and India as major growth engines has increased the demand for commodities in these countries. However, when a country enters a recession, economic activity declines and demand for commodities falls.

Transportation and Storage

The cost of shipping, rail and road transport can affect commodity prices. In addition, disruptions to transportation, such as bad weather or a drivers' strike, can lead to higher prices for goods at the destination. It can also lower prices if traders try to sell the goods locally instead of transporting them.

When there is an oversupply in the crude oil market, tankers are used as floating storage. This reduces the availability of tankers and increases the speed of delivery of the commodity.

Weather

A number of commodities can be affected by adverse weather conditions. Bad weather can damage crops, disrupt oil and gas production, make mining difficult, and cause logistical problems. Cold weather can increase demand for energy, thereby raising its prices.

On the other hand, good weather can result in a good harvest and create a glut of agricultural commodities on the market.

Seasonality

There are seasonal factors that affect both the demand and supply of commodities.

Some commodities have seasonal demand, such as energy, which rises in winter and falls in summer.

In some countries, demand for metals used in jewelry may increase during wedding season or when important festivals are held.

The supply of agricultural products may depend on when exactly the harvest is due.

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