Geopolitical events: A surge impact on commodities prices

In today's interconnected world, geopolitical events significantly shape the global markets, including commodity prices. Commodities, such as oil, gold, and agricultural products, are essential resources that drive economies and impact the daily lives of people around the world. 

In this article, we will explore the affinity between geopolitics and commodity prices to help traders, investors, and consumers understand why commodity prices fluctuate in the market.

Understanding commodities prices and their volatility

Market forces determine commodity prices and can be highly volatile due to the intricate web of factors affecting them. These factors can be supply and demand correlation, economic indicators, and geopolitical events. 

Supply and demand dynamics are the primary drivers of commodity prices. When supply surpasses demand, prices tend to decrease, while a shortage in supply can lead to price increases. 

Economic indicators, such as interest rates, inflation, and recession, also impact commodities prices. For example, commodity demand rises during economic growth, driving prices upwards.

However, geopolitical events are among the most influential factors impacting commodity prices. These events refer to political, social, and economic occurrences that significantly affect the global stage. It can range from diplomatic tensions and conflicts to regulatory changes and policy shifts. 

Geopolitical events can be both planned and unexpected, and their outcomes can shape the direction of global markets.

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The relationship between geopolitics and commodities prices

Geopolitical events can profoundly affect commodity prices due to their potential to disrupt specific commodities' supply and demand dynamics. 

For example, political unrest in a major oil-producing country can lead to oil production and supply disruptions, causing oil prices to spike. Similarly, trade disputes between nations can result in tariffs and restrictions on agricultural products, affecting their prices and availability in the global market.

Furthermore, geopolitical events can create uncertainty and volatility in commodities markets. Investors and traders often react to geopolitical developments by adjusting their positions and hedging against potential risks. These reactions can amplify price fluctuations, making commodities markets more unpredictable.

4 case studies of past geopolitical events 

It is crucial to understand the historical records of geopolitical turmoils to be prepared for similar events in the future. Here are some of the significant global events:

1. The Gulf War 

The Gulf War, which occurred in 1990 and 1991, is a compelling example of how geopolitical events can profoundly influence specific commodities, particularly oil. This conflict was ignited when Iraq, under the leadership of Saddam Hussein, invaded Kuwait. 

The turmoil and instability in the region severely disrupted oil trading, primarily affecting exports from the Middle East, a vital source of the world's oil production.

As a result of this geopolitical crisis, oil prices experienced an abrupt and staggering uprise. Given the uncertainty surrounding the conflict and its possible escalation, the fear of potential supply disruptions gripped the global oil market. 

The Gulf War led governments, multinational corporations, and financial markets worldwide to closely monitor geopolitical developments in oil-producing regions, recognising their potential to disrupt supply chains and influence the global economy.

2. The Arab Spring

The Arab Spring, a series of uprisings and political upheavals in 2010 and 2012 across several Middle Eastern and North African countries, exemplifies the intricate relationship between geopolitical events and oil commodities. 

The historic event, driven by demands for political change, democracy, and economic reforms, led to supply disruptions in the region's oil-producing nations.

Oil traders and investors became acutely aware of the possibility of sudden supply interruptions, leading to increased oil price volatility.

Furthermore, the Arab Spring's impact on commodity markets extended beyond oil, affecting various other commodities. For instance, agricultural production and export disruptions in some affected countries led to supply constraints in global food markets, contributing to rising food prices. 

3. The United States - China trade war 

The prolonged trade dispute between the world's two largest economies, the US and China, has been characterised by tariff impositions and trade restrictions across various commodities and industries.

For example, the trade war brought about a complex web of tariffs and retaliatory measures in the agricultural sector. The United States imposed tariffs on Chinese imports, including farm products like soybeans and pork, to address trade imbalances.

In response, China imposed tariffs on American agricultural exports, significantly curbing demand for US agricultural products in one of the world's largest markets. The resulting excess supply in the US agricultural sector had a cascading effect on commodities prices, depressing farm incomes and affecting global agricultural trade patterns.

This trade conflict is a reminder of how geopolitical events can trigger far-reaching consequences for specific commodities. It showcases how the imposition of tariffs and trade restrictions can disrupt established supply chains, alter global trade flows, and, in turn, influence the prices of commodities. 

4. The Russian-Ukrainian conflict

The dispute between Russia and Ukraine commenced in 2014 and has unfolded as a complex and enduring geopolitical event. 

Beyond the blatant territorial alteration, this conflict extends to the ongoing turmoil in Eastern Ukraine, where pro-Russian separatist forces have clashed with Ukrainian government troops, resulting in a protracted crisis with multifaceted consequences. 

Notably, the conflict made several changes in the global commodities supply. The country of Ukraine is a major wheat and corn exporter. The disruptions caused by the conflict have led to periodic shocks in global grain markets, exerting pressures on food prices and supply chains worldwide. 

The ongoing sanctions imposed on Russia as a consequence of its involvement in the Ukraine conflict have had a far-reaching impact on multiple commodity markets. The energy sector, in particular, has seen significant fluctuations in the prices of oil and natural gas due to disrupted energy trade, leading to increased volatility in the market. 

Furthermore, the restrictions on Russian exports have caused significant concerns in the metals market, with prices of metals experiencing fluctuations due to the uncertainty around the future availability of Russian exports. The ripple effect of these sanctions has been felt across various industries, highlighting the interconnected nature of the global economy.

Become aware of the essential news that affects commodities prices on markets.com

Geopolitical events profoundly impact commodities prices, and staying informed about these events is essential for anyone involved in trading commodities. 

The key to success in commodity trading is knowing the recent news to adapt to changing market conditions. 

At markets.com, you can use our comprehensive news analysis to guide your commodity trading. You can also trade commodities through a contract for difference (CFD), where you will be speculating the price of your chosen commodity without having an actual asset. 

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Become a member of markets.com and start your commodity trading today. 

When considering "Commodity CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.