Why Commodity Prices Move Up and Down

Understanding how and why commodities prices fluctuate can determine your success in trading these instruments. Without this knowledge, you may be fighting a losing battle.

Commodity Market Prices

Commodity markets can be volatile, and there may appear to be no rhyme or reason to their movements. Commodity pricing can be unpredictable even for the most experienced traders. However, as a rule, their price movements are a function of supply and demand. When the market shows a lower supply, prices tend to rise. Conversely: higher supplies generally result in lower prices.

Corn futures are a prime example of this phenomenon. In early 2006, corn futures were trading at around $2 per bushel, which represented the low end of the price range for the 20 years prior. This was mainly caused by soaring crude oil prices, which rapidly increased the demand for ethanol which happens to be produced from corn. Demand was likewise increasing from rapidly growing countries like China.

Consequently, prices were low for corn, whose supply then tightened. And as the new crop was planted, there would be no room for a poor crop. This tense climate made traders think twice before selling, which spiked corn prices from $2 per bushel to over $4 per bushel, within about a year.

Commodity Research Sources

The following news and research sources can help investors navigate the commodity and futures markets:

•  FutureSource: An excellent source of nearly real-time market news on all the commodity and futures markets. (Free.)
• The Hightower Report: An excellent daily report that covers all the markets. (pay service)
• FuturesBuzz: Regular market commentary from a variety of analysts. Full disclosure: the author has also provided commentary for this website. (Free.)
• Inside Futures: Regular market commentary from a variety of analysts. (Free.)
• Futures Magazine: The leading magazine that strictly covers the futures markets.
• SFO Magazine: Another good magazine that covers stocks, futures, and options.

The Bottom Line

There are three chief reasons why commodity prices move higher or lower. The first is the fundamental state of a commodity market. If current inventories exceed demand, the oversupply tends to drive prices lower. But if the demand is greater than supplies, the inventory deficit tends to push prices higher. Secondly, commodity prices fluctuate due to the technical condition of the market. Price charts often drive the behavior of investors, traders, and other market participants. Since everyone studies the same data, a herd mentality of massive group buying or selling consequently influences prices. Finally, commodity prices are sensitive to changes in the global macroeconomic and geopolitical landscape.

With all of these influential factors, predicting commodity price movements is notoriously difficult. But seasoned commodity professionals who analyze past market behaviors may have a leg up on predicting future price moves.