Since the sharp decline in the first four months of the year, commodity prices have recovered by almost 10% on average. While in the past, the main source of price increases in the physical market has come from growing demand in emerging and developing economies, it has been the recovery of the major OECD economies in combination with geopolitical tensions, mainly in the Middle East and North Africa region, which has again led to rising prices. The increased interest in the field of commodities has also become obvious when reviewing the latest data on speculative activity, which rose in gold and oil, probably again to hedge against inflation. However, the price behaviour among commodities has been different. While energy and precious metals have supported the average price trend, industrial metals and, particularly agricultural products, have continued underperforming.
The recovery in commodities on average has been driven by energy prices, which have risen by around 15% since hitting bottom in mid-April. Moreover, precious metals were also in demand in a flight to safety since the beginning of July. Since then, gold recovered by about 15%, but is still trading below the low level seen in April. Silver, however, recovered by around 25% since then and is now trading above the April level.
On the other hand, amid plenty of supply, agricultural commodities have continued sliding in the past months. While industrial metals and, particularly, copper also declined in the past months, it seems that the recent slight turnaround of the slowing momentum in China has also brought this decline to a halt.
In general, future average price increases are expected to become more muted in the main commodity areas compared to past developments. This is mainly attributable to the slowdown in emerging and developing economies, and while the recovery in OECD economies currently seems to be a major support factor for economic development, relative demand for commodities in industrialised economies is lower. On a positive note, the more muted price rises in commodities have also led to less accentuated global inflation this year.
Decelerating foreign investments into key emerging economies have also been an important and influential factor for the commodity price decline. The start of the Federal Reserve Board’s reduction of monetary stimulus in the near future could further impact the price development as it has been observed that rising commodity prices were closely correlated with rising monetary supply from mainly the developed economies’ central banks.
While energy prices rose for the second consecutive month by 2.2% m-o-m in August and 4.4% m-o-m in July, the natural gas price declined again for the fourth consecutive month, falling by 5.3% m-o-m in August, almost at the same level as in the previous two months. The agricultural sector also showed some weakness, falling by 2.2%. The decline in base metal prices seems to have come to an end. They rose by 4.2% m-o-m in August. As already highlighted, precious metals continued recovering, and both gold and silver increased by 5.2% and 11.1%, respectively.
In August, the Henry Hub (HH) natural gas price index decreased by 5.3% for the fourth straight month. Gas prices have been under pressure earlier in the month as Northeast and Midwest temperatures turned milder and allowed homeowners and businesses to turn down their air conditioners. Bearish inventory reports also affected prices negatively. However, as warmer temperatures during the second half of the month drove up demand for air conditioning, particularly in the Northeast and Midwest, prices posted a 3.9% increase.