Most Volatile Commodities - ChAI Protect / ChAI (2024)

In the intricate world of commodities, volatility is a double-edged sword: it presents both significant risk and potential reward. Commodities, by their very nature, are susceptible to wide price fluctuations due to a variety of factors including supply and demand dynamics, geopolitical tensions, environmental conditions, and economic indicators. This article delves into the most volatile commodities in the market, providing examples and insights into the factors that contribute to their unpredictability.

Energy Commodities: Crude Oil and Natural Gas

Among the most volatile commodities, energy sources like crude oil and natural gas stand out. Their prices can be highly sensitive to geopolitical events, changes in regulatory policies, technological advancements, and shifts in supply and demand. For example, crude oil prices have historically experienced significant volatility due to conflicts in oil-producing regions, OPEC decisions, and changes in energy consumption patterns. In recent months, the opposing influences of weak macroeconomic indicators and the unpredictability of the conflict in Gaza and the Red Sea have contributed to significant daily movements.

Natural gas is another energy commodity known for its price swings. Factors such as weather conditions—especially cold winters and hot summers—can greatly affect its demand for heating and cooling, respectively. Additionally, the increasing role of liquefied natural gas (LNG) in global trade has introduced more variables into the equation, affecting prices on a worldwide scale. Indeed, natural gas has been the most volatile commodity in recent times. The extreme high prices of 2021 and 2022 have since given way, but the legacy of those extreme price shocks remain. For example, when strikes were announced at key production sites in Australia in August last year, European gas prices jumped by over 20% in a single day, reflecting the remaining anxiety about another supply squeeze.

Industrial Metals: Copper and Nickel

Shifting the focus tol metals, copper and nickel stand out for their high volatility, driven by different yet interconnected factors. Copper, often referred to as "Dr. Copper" for its ability to predict economic trends, is highly sensitive to industrial demand, geopolitical tensions, and supply chain disruptions. Its extensive use in electrical wiring, construction, and renewable energy technologies means that any shift in these sectors can significantly impact copper prices.

In this regard, a consistent theme in copper markets over the past 18 months has been the prospect of a recovery for the Chinese property sector. The industry previously provided a significant source of demand for copper, and the stuttering attempts to stimulate renewed investment in the sector since have led to swings in copper prices. At the same time, there is widespread acceptance that the long-term copper supply will fall far below projected demand given the global push towards green energy and electric vehicles, a factor which has kept prices elevated in spite of other uncertainties.

Nickel, another key industrial metal, experiences price swings due to its critical role in stainless steel production and battery manufacturing. The growing demand for lithium-ion batteries, essential for electric vehicles and renewable energy storage, has placed additional pressure on nickel supplies, leading to price fluctuations. In recent years, Indonesia’s export ban, sanctions imposed on Russia, the March 2022 short squeeze and subsequent impact on LME nickel trading are just a few examples of events which have contributed to high volatility in nickel markets.

Agricultural Commodities: Coffee and Wheat

As a rule, agricultural commodities tend to be less volatile than energies, however this conventional wisdom has been disproved across a range of markets since the pandemic. At present, cocoa is the commodity which is omnipresent in market reporting due to its record breaking price climb which has included significant multi-percent day moves. As a general rule, however, coffee is the more volatile soft commodity of the two. Indeed, arabica coffee is the most volatile agricultural commodity which ChAI covers. Coffee prices can fluctuate wildly due to weather patterns in major producing countries like Brazil and Vietnam. A drought or excessive rain can significantly affect crop yields, leading to sharp price movements.

Wheat, a staple food grain, also sees its fair share of price volatility. Factors such as droughts, floods, and other extreme weather events in key growing regions can drastically alter supply forecasts and, hence, prices. In the past few years, however, it has often seemed that geopolitical events have been the dominant drivers of wheat volatility. Russia’s invasion of Ukraine in February 2024 sent CBOT wheat futures prices above $14 per bushel, around 150% higher than the current level, while the subsequent uncertainty over exports from the Black Sea region due to strategic importance of the agreed temporary grain corridor continued to impact volatility for over a year.

In the complex landscape of commodity markets, volatility emerges as a pivotal element, influenced by an array of factors such as geopolitical tensions, environmental conditions, and supply-demand dynamics. Through examining the intricate interplay of factors contributing to the volatility of these commodities, it becomes evident that while volatility presents challenges, it also offers opportunities for informed risk management strategies.