Let’s look at how the price of commodities such as oil, lithium and wheat have moved over the past month and their outlook
helped the U.S. Federal Reserve slow its interest rate tightening cycle and ultimately support commodity prices, or is a recession more probable leading to lower commodity demand?
On March 22, the Fed raised its benchmark rate by another 25 basis points. The collective raising of interest rates coupled with the bank failures is leading to a credit tightening cycle. These factors usually mean we will enter an economic slowdown or recession, which dampens commodity demand.On Sunday, the Organization of the Petroleum Exporting Countries, including Russia and others, announced a production cut of 1.16 million barrels a day.
The International Energy Agency sees demand in 2023 higher by 100,000 barrels a day based on China reopening and higher volumes of air traffic. By the fourth quarter of this year, the IEAdemand to be two million barrels a day higher than supply, leading to upward pressure on prices. Over the past three months, supply has been building at a faster rate than demand, which led to the recent fall in prices. Longer-term projections for the price of oil are higher based on supply constraints.
Higher prices in 2022 resulted in more production and ultimately an oversupply, which drove prices down to current levels. Any surplus is usually consumed during colder winter weather but this winter was unseasonably warm in many places, resulting in reduced demand. Also of note, the Freeport LNG terminal has restarted but has not ramped up to full production yet.Gold prices hit US$2,000 an ounce again in the past month. Gold breached the $2,000 level in August, 2020, and again in March, 2022.
Price expectations for most commodities are still being driven at a macro level by inflation, interest rates and recession fears – and now credit tightening. Commodity markets will to continue to be volatile through 2023 as the inflation and recession battle plays out.Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter.
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