What Drives a Volatile Commodity Market?

What drives a volatile commodity market? Supply and demand, Storage levels, Natural disasters, Climate change, and the prices of major products all influence the market. To understand why certain products are more volatile than others, let’s consider some of the most common causes of price volatility. These reasons could affect your investment decisions, so be prepared. There are some basic guidelines to follow, and these guidelines are outlined below. The volatile commodity market affects your bottom line, but they should not be the sole consideration.

Supply and demand

The volatility of the commodity price affects the whole economy. The production and export of certain commodities is highly dependent on the price of the raw materials. The volatility of these prices affects the overall economy, including the amount of government revenues and expenditures on education and health care. Therefore, it is important to understand the impact of volatile price levels on the entire economy. To better understand the dynamics of this market, you should first understand how volatile prices impact various companies.

As we know, commodities have high volatility, which makes them popular with short-term traders and speculators. Volatile prices are the trader’s paradise, but the investor’s nightmare. Investors, however, prefer a stable return and stable earnings. In fact, commodity prices have risen the most since the 1973 oil crisis. And in the next few years, these commodities are expected to reach their highest price levels since 2008.

Storage levels

The supply and demand balance in the commodity markets can be very volatile, with storage levels often being one of the most important factors. For example, in December 1998, storage levels for heating oil and gasoline were 20 percent higher than the five-year average. The volatility index, which measures price volatility, spiked to 196%, representing a rapid drop in prices and a rapid rebound. Storage levels also play an important role in predicting future prices.

Natural gas, for instance, is one of the most volatile commodities on the market. Its supply-demand characteristics and inventory constraints make it a valuable investment, with unique opportunities for minimizing risk and enhancing returns. The storage of natural gas is not limited to pipelines, with exchange products also offering opportunities for investors to generate true alpha. While well freezes and hurricanes may disrupt the supply of natural gas, they are outside of the scope of this paper.

Natural disasters

Volatile commodity markets are a common result of political unrest. Increasing temperatures and an increase in earthquakes are just two of the newest signs of global warming, and they are already having an impact on natural resources. Recent disasters such as the 2004 Southeast Asia tsunami and the 2011 earthquake in northeast Japan pose serious risks to life and property. Such an event can devastate an entire country and even spread to other regions, resulting in financial market volatility.

Both natural disasters and financial crises cause turbulence in local financial markets, which in turn affects financial assets and economic activities in other countries. In this study, we analyze the economic impact of two types of natural disasters in the Asia-Pacific region, as well as the global financial crisis. We use a heteroscedasticity bias correlation coefficient method to compare the effects of natural disasters on the economies of neighboring countries.

Climate change

The global commodity market is subject to cyclical price fluctuations. The rise and fall of agricultural commodities this year has been exacerbated by extreme weather conditions, which are caused in part by climate change. The unpredictable weather conditions have negatively impacted crop growth, harvest, and supply in many key exporters. Soft commodities are in particularly high demand as global inflation is already rising, following the post-pandemic recovery in demand. However, global powers are trying to tame climate change and slow its effects.

A higher price for energy commodities will act as a catalyst for decarbonisation, a key goal in the fight against climate change. But rising energy prices will not be enough to force society to switch to cleaner forms of energy. This will require government intervention and widespread public education to change habits and behaviour. As a consequence, the high price of oil will increase the cost of other commodities, like food and clothing. Moreover, a shortage of a particular raw material could damage UK businesses.

Digital technologies

The production of digital commodities increases aggregate net output in terms of price and quantity. But this does not mean that value-added is directly increased by the production of digital commodities. While profits from these commodities are reallocations of value from the existing pool, the amount of living labour is not directly increased by their production. In short, the increase in net output is a result of digital commodities, not a cause for alarm. But how will we know if they have any impact on the value of the monetary system?

The volatility of commodity prices is a significant issue for commodity businesses, which are facing multiple challenges – increasing costs, competition, and squeezed margins. However, recent technological advances provide innovative ways to tackle these challenges. These solutions combine people, data, and systems to optimize value, minimize supply chain disruptions, and enable better decisions. These innovations will help commodity businesses make more informed decisions. And as the world of commodities becomes more digital, the impact on companies’ bottom lines is bound to follow.

Earnings at risk framework

Increasingly, agribusiness firms are concerned about their exposure to volatility in the commodity market. The current regulations governing public companies require such firms to disclose their market risk. Despite this, very few studies have addressed the risk management of commodity trading. In contrast, many financial experts consider VaR to be a useful risk measure for commodity firms. It is essential to understand the estimation techniques used for VaR to use the measure effectively.

In this paper, we propose an Earnings at Risk framework that incorporates several risk factors that affect the volatility of a portfolio of commodities. Our framework focuses on the market volatility of oil and energy, as well as other common commodities. However, it does not take into account all aspects of liquidity trading risk. Therefore, it only works well when the impact of illiquidity is significant. The framework can be applied to a wide range of trading activities, including commodities.

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