Three surprises that could inflame commodity markets in 2024

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Three surprises that could inflame commodity markets in 2024

The Economist | January 4, 2023

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As Russia continues to pound Kyiv, Western sanctions are beginning to cripple Arctic lng, Russia’s largest gas-export project. In the Red Sea, through which 10% of the world’s seaborne oil travels, American forces are doing their best to repel drone attacks by Yemen’s Houthi rebels. On January 3rd local protests shut down production at a crucial Libyan oilfield. A severe drought in the Amazon risks hampering maize shipments from Brazil, the world’s largest exporter of the grain.

And yet, across commodity markets, calm somehow prevails. After a couple of years of double-digit rises, the Bloomberg Commodity index, a benchmark that covers raw-material prices, fell by more than 10% in 2023. Oil prices, at a little under $80 a barrel, are down by 12% over the past quarter and are therefore well below the levels of 2022. European gas prices hover near their lowest levels in two years. Grains and metals are also cheap. Pundits expect more of the same this year. What, exactly, would it take to rock markets?

After successive shocks inflamed prices in the early 2020s, markets have adapted. Demand, held back by suppressed consumption, has been relatively restrained. But it is the supply response to elevated prices, in the form of an increase in output and a reshuffling of trade flows, that makes the world more shockproof today. Investors are relaxed because supply levels for many commodities look better than they have since the late 2010s.

Abundant supply suggests a sedate first half of the year. After that, surpluses could narrow. Non-opec oil output may level off. Delays at some American liquefaction-terminal projects, which were originally set to start exporting in 2024, will frustrate Europe’s efforts to restock gas. Low grain prices will crush farmers’ margins, threatening planting. Markets will be more exposed to shocks, of which three stand out: a sharp economic rebound, bad weather and military blow-ups.

Whether or not big economies avoid a recession, the pace of global growth is expected to be slow, implying modest growth in raw-material demand. Inflation is also expected to ebb, so commodities will have less appeal as a financial hedge. But a surprise is not impossible.

It would take something extreme—or a mixture of less extreme but still unlikely events—to blindside commodity markets. That is not quite the solace it seems. They have been blindsided by similarly improbable events several times this decade.

3 key takeaways from the article

1. As Russia continues to pound Kyiv, Western sanctions are beginning to cripple Arctic lng, Russia’s largest gas-export project. In the Red Sea, through which 10% of the world’s seaborne oil travels, American forces are doing their best to repel drone attacks by Yemen’s Houthi rebels. On January 3rd local protests shut down production at a crucial Libyan oilfield. A severe drought in the Amazon risks hampering maize shipments from Brazil, the world’s largest exporter of the grain.  And yet, across commodity markets, calm somehow prevails.
2. After successive shocks inflamed prices in the early 2020s, markets have adapted. It is more supply response to elevated prices, in the form of an increase in output and a reshuffling of trade flows, that makes the world more shockproof today. 
3. Whether or not big economies avoid a recession, the pace of global growth is expected to be slow, implying modest growth in raw-material demand. Inflation is also expected to ebb, so commodities will have less appeal as a financial hedge. But a surprise is not impossible.

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Topics:  Global Trade, Commodity Markets, Inflation