Commodities are essential goods typically produced in large quantities and are interchangeable with other goods of the same type. These goods are often used as inputs in producing other goods or are consumed directly. Commodities include crude oil, natural gas, agricultural products like corn and wheat, metals like gold and silver, and other raw materials.
Commodities are traded on commodities exchanges, where their prices are determined by supply and demand. Because commodities are often produced in large quantities, their prices can be influenced by weather conditions, geopolitical events, and government policies.
Commodity trading is often used for businesses to manage their price risk. For example, a company that relies on a particular commodity as an input for its production process may use commodity futures contracts to lock in a price. This helps the company avoid the risk of price fluctuations, which can impact its profitability.
Commodities and the Global Economy
The commodities’ prices also impact inflation rates and overall economic growth. When commodity prices are high, it can lead to inflationary pressures as the cost of producing goods and services increases. This can also impact consumer spending and overall economic growth. Conversely, when commodity prices are low, it can lead to lower inflation rates and be beneficial for businesses and consumers, as it can lead to lower prices for goods and services.
2023 Drop in Commodity Prices
According to the World Bank, as of March 2, 2023, energy commodities have declined by 7.3%; coal has decreased by 34.8%, and natural gas in the U.S. by 27.2%. These falling energy prices, according to OECD have provided a modest improvement in the global outlook. However, the prices are still relatively high compared to pre-pandemic prices. The World Bank says future markets predict lower natural gas prices in 2023 but higher than the 2017-2021 average until the end of 2026.
Why Are Energy Commodities Decreasing?
Commodity declines can be influenced by a variety of factors, both economic and political. These factors can be complex and interact with each other unexpectedly, making it difficult to predict or fully explain changes in energy commodity prices. A few aspects related to the energy commodities decreasing are:
Oversupply: An oversupply of energy commodities such as crude oil, natural gas, and coal can lead to falling prices. Europe, for example, has natural gas storage facilities that are 72% full, a stockpile that surpasses their 2019 record. An oversupply will lead to a decrease in prices.
Decreased demand: A decrease in demand for energy commodities can also lead to falling prices. This can happen during economic downturns when businesses and consumers reduce energy usage. Warmer weather in the U.S. and Europe has reduced the demand for natural gas this winter.
Technological advancements: Technological advancements can make it cheaper and more efficient to produce energy from renewable sources such as wind and solar. This can lead to decreased demand for fossil fuels and a corresponding price decrease. The U.S. Energy Information Administration predicts that electricity generation from renewable sources has contributed to lower power prices.
Geopolitical events: Geopolitical events such as wars, trade disputes, and sanctions can impact the global supply and demand for energy commodities. This can cause prices to fluctuate based on these events’ perceived risks and opportunities. According to Reuters Business, the war in Russia and Ukraine caused prices to spike in 2022 when Europe lost its Russian fuel, and OPEC cut production targets.
Currency exchange rates: Energy commodities are often priced in US dollars, so currency exchange rates can impact the price of energy commodities for buyers and sellers in other countries.
How can Commodity changes impact business?
Commodity price changes can significantly impact businesses, especially those that rely heavily on producing or selling commodities. This impact can be seen in input costs, where the price or availability of a commodity can increase costs for businesses. Supply and demand for goods can also be affected by commodity price changes, impacting businesses that sell or use that commodity. Additionally, changes in commodity prices can cause currency fluctuations, affecting the currency’s value in countries where commodities are significant export. Businesses must monitor these changes carefully and adjust their strategies accordingly, such as finding alternative suppliers or inputs, diversifying product offerings, or adjusting pricing strategies.
How can an energy audit help your business with fluctuating commodity prices?
An energy audit focused on the bills themselves is valuable for businesses to manage costs and identify savings and refunds, particularly during fluctuating commodities. A utility bill audit can identify areas of excessive spending, optimize rates and tariffs to reduce costs and minimize the impact of commodity price fluctuations. Additionally, an energy bill audit can help companies to reduce exposure to energy price volatility and ensure long-term profitability. Speak with an energy auditor today to learn more. The experts at Tenurgy are ready to help your company save money.