Commoditity market and shaping factors – weather, seasonality, intermarket corelations and market positioning
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What affects the commodity market?
Balance - the difference between demand and supply
The most important aspect in determining the price of a commodity is the balance between supply and demand. Very often, only the difference between production and consumption is analyzed, while supply includes additionally available stocks, and demand does not necessarily mean only consumption, but also the desire to stockpile. In the case of production, it is crucial to determine its cost, because in the vast majority of cases, producers will not extract or produce a given good, incurring losses.
That's why it's so important for a trader to keep track of supply and demand data or changes in stock levels. This data is published with different frequency, depending on the asset. For agricultural commodities, we usually refer to an annual period, but updates are made on a monthly basis, as in the USDA (United States Department of Agriculture) WASDE report. In the case of industrial metals, it is worth following the data provided by Metal Bulletin , although they are delayed by up to 3 months.
In turn, the US Department of Energy publishes weekly data on crude oil inventories, petroleum products as well as production and trade in this raw material. In addition, the EIA and IEA publish important data from a global perspective every month. OPEC, in turn, publishes monthly oil production data and market forecasts for the coming quarters.
Seasonality
When it comes to seasonality, it's worth distinguishing between two issues - the economic cycle and the weather. Economic cycles can last for years, so continued positive economic activity can put upward pressure on metal prices. Stock market trends can also last for more than one year. In the case of agricultural commodities, seasonality plays a key role. We have sowing, growing and harvesting periods during which prices tend to follow certain trends. In the case of agricultural commodities, important data from the USDA are published twice a year, which present forecasts of crops sown and then the amount of crops actually planted. Crude oil can also be a commodity with seasonality. In the summer, we observe an increased demand for fuels, while in the autumn fuel production is often reduced, which results in an increased increase in inventories.
Seasonality can be useful in determining the likelihood of a trend continuing or ending. Source: xStation 5. Please note that information and research based on historical data or results do not guarantee future profits.
Weather
Not only does the weather affect seasonality, where it is important to know when an agricultural commodity will be sown and harvested, it also tells you what harvest to expect. Good weather allows for significant yields, but droughts, downpours or other natural disasters undermine these prospects, which usually leads to higher prices. Weather is also important for energy commodities. In winter, we have an increased demand for gas due to heating, while in summer - due to the use of gas to produce electricity to power air conditioners that were used more heavily at that time.
Basically, it is seasonality that is pre-priced by the market. However, anomalies to normal trends often result in increased price volatility.
Market positioning
A very important aspect for the commodity market is the positioning of investors on futures contracts. The genesis of futures markets was the desire of commercial investors (manufacturers, traders, etc.) to hedge against price changes. However, the development of financial markets has made speculation a much more popular use of futures markets. Typically, the positions of speculators and commercial investors are opposite to each other. For example, speculators buy coffee contracts expecting their price to rise, while coffee producers sell contracts to hedge their future selling price.
Investors should pay the greatest attention to the positioning of speculators. Extreme overbought or oversold levels can signal a change in trend direction. Source: xStation 5. Please note that information and research based on historical data or results do not guarantee future profits.
Intermarket correlations
In the commodity market, as in other financial markets, there are correlations between individual assets. However, it should first of all be noted that the vast majority of goods are quoted in US dollars. This situation means that commodities are often expensive in terms of US dollars for importing countries, such as China, which makes it necessary to balance the influence of currency. Thus, it can be seen that the expensive US dollar means downward pressure on commodity prices. In addition, you can also see local dependencies, such as coffee and the Brazilian real, or the impact of commodity prices on currencies: for example, expensive oil has a positive effect on the Canadian dollar or the Mexican peso. In addition, the gold market is strongly dependent on the level of interest rates, which is why an inverse correlation can be observed between bond yields and gold prices.
The relationship between gold and US bond yields is significant in both the short and long term. Divergences can be used when making investment decisions. Source: xStation 5 Please note that information and research based on historical data or results do not guarantee future profits.
