TradingKey - The ongoing decline in international oil prices in March 2025 has caused significant movements in the commodity markets. Brent crude oil futures have dropped below the critical $ 70-per-barrel threshold, marking a near three-year low. This downturn in oil prices is closely related to increased supply. OPEC announced that eight OPEC+ oil-producing countries plan to gradually increase oil production starting April 1, reversing the voluntary production cuts announced in 2023. Moreover, Russia's crude oil exports in March exceeded quotas by 220,000 barrels per day, while new production capacity from the UAE's Upper Zakum oil field has surpassed expectations.

This clearly illustrates the impact of supply and demand dynamics on commodity price fluctuations, emphasizing the importance of fundamental analysis. Fundamental analysis is crucial for contextualizing commodity price movements, which are often shaped by macroeconomic conditions and global events.

Understanding supply and demand dynamics is essential for analyzing commodity prices. These two factors are closely interconnected, with fluctuations in one directly impacting the other.

Supply

Production capacity is undoubtedly a key factor influencing commodity prices. When supply exceeds demand, prices face downward pressure; conversely, a reduction in production capacity tightens supply and pushes prices higher.

Demand

Demand is closely linked to economic development, emerging industries, and consumer preferences. When market demand is strong, prices tend to rise; if consumption declines, demand for commodities often diminishes, leading to price drops.

Gross Domestic Product (GDP)

GDP is a key indicator of a country’s or region’s overall economic activity and has significance to commodity prices. Strong GDP growth typically reflects increased industrial production and consumer demand, driving up prices for commodities such as oil, metals, and agricultural products. Conversely, a shrinking GDP may signal decreased demand, leading to lower commodity prices.

Impact of Inflation Rate

In a moderate inflation environment, an increased money supply reduces the relative value of currency. To preserve and grow their wealth, investors often allocate funds to tangible commodities with stable intrinsic values as a hedge against currency depreciation, thereby increasing investment demand and driving prices moderately higher. 

However, in a high-inflation scenario, the scenario becomes more complex. Rising energy and raw material costs significantly increase production expenses, pushing commodity prices up. Simultaneously, high inflation can stifle economic growth and reduce consumers' purchasing power, potentially lowering actual demand for commodities. If the decline in demand outweighs the upward pressure on prices from currency depreciation and rising costs, commodity prices may ultimately fall.

Role of Interest Rates (IR) and Exchange Rates (ER)

When interest rates rise, the cost of investing in commodities increases, and capital flows shift towards the bond market, reducing demand for commodities and driving prices lower. Conversely, falling interest rates stimulate investment demand, pushing prices higher.

 Regarding exchange rates, a depreciating domestic currency increases import costs for commodity-dependent countries while making international prices relatively cheaper, potentially increasing demand. In contrast, when the currency appreciates, import costs decrease, making international commodity prices more expensive, which can reduce demand and exert downward pressure on prices.

Frequent geopolitical events such as wars, sanctions, and trade friction can cause significant shocks to the commodity markets.

A prime example is the 2022 conflict between Russia and Ukraine, which has had far-reaching effects on energy and metal commodity prices. As a major energy exporter, Russia faced Western sanctions that disrupted its energy exports, lowering expectations for global oil supply. This escalation of investor concerns drove oil prices significantly higher. At the outset of the conflict, Brent crude futures surged past $120 per barrel, reaching a multi-year high. The increase in energy prices led to a rise in transportation costs, indirectly impacting the prices of other commodities.

In the metals market, Russia is a major producer and exporter of metals such as nickel and aluminum. Sanctions and trade restrictions resulting from the conflict have created uncertainty around Russian metal exports, raising concerns about supply shortages. In March 2022, nickel prices on the London Metal Exchange soared by 73.93% in a single day, prompting the exchange to suspend nickel trading.

Seasonality in agricultural commodities refers to predictable price fluctuations throughout the year, driven by natural cycles, weather patterns, and agricultural production schedules.

Key Factors Influencing Seasonal Cycles

• Planting and Harvesting Cycles: Agricultural commodities experience significant seasonal changes based on planting and harvesting times. For example, prices for crops like corn and cotton typically reach their lowest points during the late spring planting season due to ample supply. However, prices often peak in mid-summer or July, when there is a potential for supply shortages.
• Natural Climate Conditions: Climate plays a crucial role in crop growth. In the Northern Hemisphere, wheat is typically sown in autumn, dormant in winter, green in spring, and harvested in summer. Severe winter cold or adverse spring weather, such as droughts or frosts, can impact wheat yields, thereby influencing market supply and prices throughout the seasons. For tropical natural rubber, typhoons and heavy rains can damage rubber trees, disrupting tapping operations and supply, leading to price fluctuations.
• Government Policies: Government interventions, such as subsidies and tariffs, can also influence seasonal cycles by altering supply and demand dynamics. For example, subsidies during planting seasons may encourage production, influencing market prices and trends.

The prices of energy commodities are also heavily influenced by seasonal cycles, with natural gas and crude oil being prime examples. Natural gas experiences a significant demand peak in winter, as it serves as a crucial energy source for residential heating, commercial heating, and industrial production, demand surges during frigid winters. In high-latitude regions of the Northern Hemisphere, extremely cold winters further increase reliance on natural gas. As winter sets in, the surge in heating demand often leads to market shortages, driving prices higher.