Commodities have been in the dumps recently. However, last week, commodities started to realize gains. Today, we’ll talk about why the value of commodities has been declining, why we’re seeing gains in commodities, and what we can expect to see moving forward. So, let’s get right to it…
Why Commodities Have Been Declining
The commodities market is interesting in the sense that there are two main reasons for gains or declines in the market. One of those reasons is supply and demand, the other is the value of the USD. With that said, here’s why we’ve seen commodities decline…
- Oil – Oil is a commodity within its own class. In the case of oil, supply and demand has taken a major toll for the past year. Essentially, there has been far more oil being produced than the world is using. This leads to a massive supply glut; essentially, driving the price of oil down.
- Other Commodities – Most other commodities have been dealing with supply and demand issues, but for different reasons. The fact of the matter is that most commodities are priced using the United States dollar. This means that when the USD is strong, the price of commodities in other nations gets higher. Adversely, when the USD declines, the price of commodities declines in other nations as well. With that said, the USD has been incredibly strong for quite some time. This has made commodities more expensive outside of the United States. As a result, demand abroad has declined; leading to declines in the value of commodities.
Why Commodities Are Starting To Rise
- Oil – In the case of oil, the value has been increasing based on production. While the value of oil declined because of overproduction, there are signs that production is starting to slow. In the United States, the EIA announced that oil production in September fell quite a bit. Also, OPEC has called on OPEC members and non-members to work together to solve the supply glut This has led to a rally in the value of oil.
- Other Commodities – In the case of other commodities like gold and silver, we’ve seen improvements in value as well, but for different reasons. The United States Federal Reserve has made the decision to delay its rate hike yet again. In making that decision, the Fed also made announcements that the global economic issues could cause problems for the United States economy. As a result, the value of the USD started to fall. With the value of the USD declining, commodities are starting to become less pricey in other nations; leading to heavier demand abroad and improvements in values.
What We Can Expect To See Moving Forward
In the case of oil, I think that the spike we saw in the commodity’s value last week is likely to be short lived. While the US did produce less oil in September, we still have a massive supply glut and 120,000 barrels a day is a drop in the bucket compared to the 2 million barrel a day problem. However, in the case of other commodities like silver, gold, wheat, and more, I believe that we’re going to see continued improvement. The bottom line is that the United States economy doesn’t seem to be a short lived issue. As the dollar continues to fall, demand for commodities will likely continue to rise, offering more and more support to the market.
What Do You Think?
Where do you think commodities are headed and why? Let us know in the comments below!