Factors Affecting Commodity Prices

Originally published in August 2019’s issue of Energy & Metals Consensus ForecastsThe unabridged article and a recent sample issue are available to industry professionals. Simply send us an email at editors@consensuseconomics.com

In this month’s special survey, we asked our Energy and Metals panellists and other economists to rank the current – August 2019 – importance of a range of different factors (namely ‘demand/business cycle’, ‘supply/production constraints’, ‘government trade policies’, ‘FX linkages/US dollar value’ and ‘investment funds’) in determining commodity price movements. Scores were assigned to each of the factors  on a scale of 0 (no influence) to 10 (very strong influence). The consensus results are the averages of individual panellists’ scores for each factor. Given that different commodities are influenced by a wide range of factors, we limited the variables considered to a common list of five factors which we asked our panellists to assess for relative importance.

Commodity prices are notoriously volatile and clearly influenced by a wide range of different factors. The importance of each factor varies from commodity to commodity and, for any given material, over time. In our latest special survey on ‘Factors Affecting Commodity Prices’, which is conducted at a time of slowdown in global demand and the business cycle, we asked panellists to compare and rate the differing degrees of sensitivity with which the prices of different commodities respond to a range of influences. As these factors sometimes work in opposite directions, the survey might also help to determine which of them are likely to dominate. In addition to the traditional factors ranked at our request, we also asked our panellists for commodity-specific suggestions.

For Crude Oil, which has dropped back below US$60 per barrel in recent weeks, ‘Saudi Aramco IPO’ – i.e. the initial public offering of the Saudi Arabian national petroleum and natural gas company – and the focus on ‘Climate Change and New Green Technologies’ were put forward as considerations outside the five factors that could affect its price outlook (scores of 5.2 and 4.3, respectively). A possible escalation in US sanctions against Iran (score 4.8) was also mentioned, after Tehran made new threats in July to restart deactivated centrifuges to boost uranium enrichment. A violation of the nuclear deal limit would deepen tensions with Washington, which withdrew from the agreement in 2018, and exacerbate the security situation along the Strait of Hormuz, a key oil transportation route. In terms of demand, new emission standards to slash pollution produced by the global shipping industry will come into force in less than five months. The IMO 2020 rule may add a premium on domestic sweet grades and more expensive middle distillates, which could put producers of oil with high amounts of sulphur at disadvantage. Yet the situation is complicated by uncertainties about the degree of compliance and the strength of regulatory enforcement by region.

Energy infrastructure, meanwhile, continues to be flagged as an influence on US Natural Gas, which is also viewed as a crude oil substitute in power generation (below). Henry Hub slid toward US$2.0/MMBtu last month, due to shale-driven supply excess and the ongoing development and construction of LNG facilities. Opportunities for US exports to Asia and Latin America have expanded over the past 6-12 months, after new liquefaction units (at the Sabine Pass, Cove Point and Corpus Christi) became operational. In addition, the Elba Island LNG project near Savannah, Georgia, is scheduled to be completed by end 2019, while more shipment terminals – Cameron in Louisiana and Freeport in Texas – are currently being commissioned.


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