Price cycles are highly synchronized across commodities
Energy, Metal, are Previous Metals are generally more volatile to global macro factors, while Agricultures and fertilisers are relatively stable.
In a word, commodity prices are highly correlated.
The commodity prices of some highly volatile commodities such as energy, metal, and precious metals are more likely to move in a similar way. For example, the increase in the crude oil price pushed up other commodities’ prices (inflation, or price level, is going higher as well, because the crude oil affects a large range of industries).
Global macroeconomic shocks have become the main source of commodity price volatility
Since 1996, global demand shocks have accounted for 50% of the variance of global commodity price growth, while global supply shocks accounted for about 20%.
We note that there are no obvious huge supply shocks after 1996. The market experienced the dot com bubble, the 2008 financial crisis, and the Covid pandemic.
Data shows that between 1970 and 1996, supply shocks dominate. During that period, the global market was exposed to the Oil Crisis in the 1970s.
In the current world, we may consider the Ukrian Russia Crisis causes a supply shock of energy commodities. Also, the de-globalisation process, trade protectionism, and increasing focus of sovereigns on metal resources are decreasing the supply and harming global transactions of those commodities.
The macroeconomic condition affects the commodity price in a significant way.
Global recessions have been accompanied by demand weakness and supply disruptions
In the recession, with demand weakness and supply disruption, the impacts on commodities may offset each over, but undoubtedly there is a decrease in the quantity needed and supplied. In 2020, these were offset by supply pressures resulting from widespread supply chain disruptions (in early 2020). Decrease in demand and disruption in supply offset their effects on the commodity price.
However, the price could definitely be volatile, and the effects would largely depend on whether the demand shock or the supply shock dominate. During global recessions, demand pressures on commodity prices were compounded by supply pressures specific to commodity markets (1975, 1991, 2020 late)
The recovery of commodity prices after recessions has been driven by an unwinding of supply or commodity market shocks and, since early 2000, also by rebounds in demand. Consistent with this, the surge in commodity prices in 2020-21 can be explained by a strong resurgence of demand, combined with unusually widespread supply bottlenecks.
The Monetary Factors are also needed to be taken into consideration. With more liquidity in the market, money would be used to chase those goods that are less likely to lose their value.
In The Recently World
Months before, the Ukraine-Russia war causes sanctions on crude oil and natural gas export from Russia, blocking the supply of those commodities to the EU. However, Europe is recovering from the pandemic, and thus has rigid demand for them. In the meantime, Quantity Easing by the U.S. release extra money into the market and push up the commodity price even further. Commodity prices went up.
Currently, the Fed announces that it will fight the inflation rate back to the 2% target, and thus increases the federal reserve rate with a schedule. Fed causes the panic of getting into recession. With that pessimism expectation, demand is expected to fall and commodity prices would fall.