At the beginning of 2016 the World Bank slashed its price forecast for 80% of major global commodities. Crude oil, precious metals and many more were all predicted to continue dropping in value, as the commodities slump which has been ongoing since 2011 didn’t look like slowing down at all this year.
Much of that prediction has rung true, but once again there have been a number of important events that have significantly affected the volatility of commodity prices. These are some of the major ones which have introduced a lot of risk to commodity trading, some of whose impact will still be felt in 2017.
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As one of the most popular safe-haven investment options, it was little surprise that the price of gold increased in the aftermath of Brexit. After years of debate the UK finally had a national referendum at the end of June regarding its EU membership. This in itself was always going to inject some volatility for commodity traders, but the somewhat surprising result added an extra amount.
Along with gold experiencing a sharp spike in the days after Brexit, other commodities such as oil, copper and more all dropped. The uncertainty of the Brexit decision and what would happen regarding trade between the UK and other nations triggered such falls in value.
Political events always cause price fluctuations across many markets, and as arguably the biggest in 2016 the US election had a large impact on commodities. Historical data has shown that in the weeks following an election the price of oil generally slides after the election and gains again after their inauguration.
In a similar way to Brexit, the election of Donald Trump was something of a surprise. Plus, with oil prices already struggling before the election, it made it harder to determine which factors were most responsible for falling oil prices.
Demand in Emerging Markets
Supply and demand have a major impact on commodity prices as they are traded assets. If demand outstrips supply or vice versa then they can swing massively one way or the other. Emerging markets had been growing and supporting the commodities market but in 2016 they became a little bit more divergent.
Commodity-exporting emerging markets such as Brazil had been riding a positive wave, but its output was predicted to contract in 2016 as demand fell. On the other hand, for Mexico it was forecast to grow, mainly due to the strong performance of the USA, as its largest trading partner.
As the largest country on the planet and one of the fastest growing economies, whatever China does seems to impact upon commodities. By 2014 it was responsible for 47% of world metals consumption, while also one of the largest manufacturers and exporters.
In 2015 China shocked the world by devaluing its own currency which led to a sharp downturn in commodity prices. In 2016 the country continued to devalue its currency but at a much smaller rate, while its manufacturing levels were down as well, resulting in supply and demand fluctuations and consistent price changes.
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Weather can have a big impact on commodities such as wheat, coffee, rice and many more. Supply can be limited when storms hit certain regions, destroying crops and these commodities while the demand for them is likely to remain at the same level.
There were many hurricanes, storms and other forms of destructive weather in 2016 that hit areas known for producing some of these commodities. There are always scares about there being a lack of certain commodities but for the most part these storms did not have too bad an effect on the production or price of commodities.
Monetary and Environmental Policies
Monetary and policy imbalances will be reflected in a supply and demand imbalance, leading to price fluctuations in the commodities market. China devaluing its currency created one such imbalance, while worries about what would happen to the US dollar and its other policies when Trump takes charge was another factor. Environmental policies were being rolled out by many nations to tackle climate change and global damage, which also impact upon the production of certain commodities.
Consider how these events affected the commodities market in 2016 and begin planning your trading strategy for 2017 based around future possibilities.