What Are the Main Drivers of Commodity Prices?

With financial markets becoming increasingly accessible, many traders are turning to the commodity markets in search of new opportunities. However, commodity markets are often characterised by high volatility, which can significantly impact the trading strategies employed.

Understanding the factors that drive this volatility is essential for traders aiming to navigate these markets successfully. In this article, we explore the key drivers of commodity market volatility and what they mean for traders.

TL;DR:

• Supply and Demand: Price rises with increased demand or reduced supply; falls with oversupply or reduced demand.
  • Example:Oil prices crashed in 2020 due to plummeting gasoline demand during global lockdowns.
• Currency Movements: Commodities are mostly priced in USD. A strong dollar usually puts downward pressure on commodity prices.
  • Example: When the USD strengthens, gold prices and oil prices often decline in dollar terms.
• Geopolitical Situations: Conflicts and sanctions in commodity-producing regions can lead to supply disruptions and price spikes.
  • Example: U.S. sanctions on Iran or the Russia-Ukraine war significantly impacted oil and grain prices.
• Economic Growth: A country's economic health affects both production and consumption of commodities.
  • Example: Venezuela's economic collapse crippled its oil industry, affecting global oil output.
• Mother Nature: Weather events influence agricultural commodity yields and energy demand.
  • Example: Drought and frost in Brazil in 2021 drove up coffee and corn prices.
• Transportation & Storage Costs: Costs related to moving and storing commodities can affect overall pricing.
  • Example: Using oil tankers for storage during oversupply periods raised global shipping rates.

Supply and Demand

As the supply and demand for commodities change, the price of the commodity will also change. The fundamental rule is that commodity prices will rise with increasing demand. Prices will also rise when there is a fall in the overall supply or inventory of a commodity. On the flip side, the price of a commodity will fall when faced with decreasing demand and increasing supply.

For example, in 2020, with the emergence of the Coronavirus pandemic, the world was put on hold as a global wave of lockdowns kept people home. With the shift to a home-stay, the demand for gasoline sank, and as a result, the prices of oil tumbled. At some point, the price of WTI stooped as low as $18 a barrel on 20 April 20 2020.

Currency Movements

Commodities are generally priced in USD. As the wider value of the USD rises and falls, so can the price of commodities. For example, if the USD experiences a sharp rise against a basket of major currencies, as expressed in commodities, this could see a fall in the prices of commodities such as Crude Oil (CL), as well as other energy, precious metals, and agricultural products.

It is, therefore, prudent to keep your eyes on the forex market as well when trying to understand the broader commodities market. Nonetheless, of course, markets do not always operate so uniformly.

However, such external factors should be considered when trading. For instance, the price of the US dollar affects commodities like gold (XAU), in that since gold is an asset that has intrinsic value, its worth can ebb and flow, and when the US dollar strengthens in relation to other currencies, gold prices tend to dwindle in dollar terms. Furthermore, it is said that commodity prices and inflation affect one another.

Geopolitical Situations

Some commodities are produced in regions that experience a great deal of political uncertainty. Crude oil is largely produced in countries around the Middle East. This means that the price of Brent and WTI can be heavily influenced by tensions that historically occur in that region.

Examples:

• When the United States imposes economic sanctions on Iran, crude oil prices typically rise due to the anticipated reduction in Iranian oil supply.
  
  

  In May 2025, amid heightened tensions in the Middle East and the conflict between Israel and Iran, the U.S. Treasury Department sanctioned more than 20 companies linked to a network that had long facilitated shipments of Iranian oil to China.

  These sanctions aimed to disrupt Iran's revenue streams that support its ballistic missile and drone programs, nuclear proliferation efforts, and proxy groups such as the Houthis. They formed part of the Trump administration's renewed "maximum pressure" campaign, which seeks to drive Iran's oil exports to zero and prevent the development of nuclear weapons.

  In response to the sanctions, oil prices surged sharply. Brent crude rose by over 6%, while WTI increased by more than 5%, reflecting heightened market concerns following the escalation of regional tensions and attacks.

• Another distinct example of this is the war between Russia and Ukraine, which started in February 2022.
  
  This war shocked the commodities market, and according to the World Bank's Commodity Market Outlooks, it caused grave disruptions in the production of commodities, especially those exported from Russia and Ukraine. Russia is considered one of the largest exporters of coal, crude oil, natural gas, wheat, and aluminium.
  
  Thus, geopolitical tensions caused the physical destruction of commodity production on post-Soviet soil and disruption in commodity trade and exportation due to sanctions on Russia.

Economic Growth

A country's prosperity can also affect the price of a commodity. This is because a country's economic prosperity determines the purchasing power of its population. The effect is more obvious if the country in question is a major producing country or a major commodity user.

A good example is the case of Venezuela. Although a major oil country, the government has damaged the country's oil industry due to a lack of investment, corruption, and cash shortages. This, in turn, has crippled the economy and caused hyperinflation. Moreover, the economic sanctions imposed on Venezuela have further constrained oil production, exports, and revenues in the country.

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Mother Nature

Mother Nature also plays a decisive role in determining commodity prices, especially in the agricultural sector.

Favourable weather may result in a bumper harvest, leading to an oversupply of a commodity. In contrast, adverse weather can result in the destruction of a harvest, leading to a shortage in the supply of a commodity to the market.

Adverse weather can also affect the price of heating oil and natural gas. A cold spell can increase demand for energy products, pushing prices higher.

For example, in April of 2021, Brazil, one of the biggest coffee and corn-producing countries, suffered a wave of droughts followed by frost. Needless to say, these unfavourable weather conditions spiked the prices of coffee and corn supplies.

Transportation and Storage Costs

Although not usually a major factor, transportation costs can also play a part in moving commodity prices. For example, crude oil tankers sometimes double as storage facilities during times of oversupply. This action has the effect of making tankers available out of the transportation market, resulting in higher shipping rates.

The Bottom Line

As shown above, there are many factors that play a part in determining the prices of commodities. Some factors, such as government policies, are predictable, whereas some factors, like mother nature, are unpredictable. It is important to familiarise yourself with all the significant factors, such as those listed above, to be better prepared when trading the commodity market. Trading in commodities is high-risk, so it is important to employ risk management strategies and choose a reliable and established provider such as Plus500 that operates professionally and under strict regulatory guidelines. Providers such as Plus500 offer commodity trading on an online platform in the form of contracts for difference (CFDs).

*Past performance does not reflect future results

*This article contains general information which doesn't take into account your personal circumstances.