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on commodities

Commodity prices started rising in November based on the expectation that the Federal Reserve will cut its policy rate six times in 2024.

The market currently expects a rate cut in May followed by five more 25 basis points cuts between June to December. The personal consumption expenditures price index (PCE) reading comes out on Friday. The FED watches this index closely as it is an inflation indicator for goods and services purchased by consumers. It has been falling for the last three months.

Commodity prices and interest rates interact two ways: Falling interest rates drive the dollar lower which means commodities are more expensive in dollar terms. Also falling real (stated rate minus inflation) rates lead to higher commodity prices through increased demand and reduced inventories.

Let’s start by looking at a few energy commodities: Natural gas, oil and uranium:

With the cold weather in Western Canada, natural gas prices at the AECO hub soared to $14 Cdn/GJ January 12th to 15th and have since pulled back to the $2.50 Cdn/GJ range. Temperatures are expected to moderate over the next two weeks in Western Canada and remain seasonal through central and eastern Canada. Longer term Gas Alberta sees the price of Natural Gas rising out to 2027.

In mid-December in the United States, the price of natural gas was down to $2.22 per million British thermal units (MMBtu) before rising to $3.25 over the next four weeks. As of last Fridays report from the EIA, natural gas in storage is 11 percent above seasonal norms. Natural gas flows into LNG plants are also at a three month low. These factors along with the expectation for warmer winter weather, which lowers demand and allows production to increase, are pushing down the price of natural gas.

Oil prices continued to be driven by Middle East tensions, US production and longer term economic growth expectations especially in China. There are about 104 million barrels of oil produced each day globally with the United States accounting for twenty percent of that volume and OPEC + counties fifty percent. There is an interesting supply/demand dynamic going on as OPEC has announced production cuts and the US, Brazil and Guyana have increased production. US oil production did fall last week with the extreme cold in the west and mid-west. In the Middle East, the ongoing conflict has reduced both oil and container ship traffic though the Red Sea by as much as 40 percent. Both of these factors have helped to support oil prices short term in the $73 to $74 per barrel range. The International Energy Agency (IEA) and OPEC see improving demand leading to higher oil prices in 2025.

Uranium is also classified as an energy commodity. When we last discussed uranium (U3O8) in November it was approaching USD$80 per pound. Uranium prices are currently at USD$106 on the back of continued and rising demand coupled with lower production outlooks at different mines around the world. The desire to not purchase Russian uranium continues as well. There are 440 nuclear reactors globally with 60 currently under construction and a further 110 in the planning stages according to the World Nuclear Association. Part of the construction numbers are to replace reactors being decommissioned. Going forward, the World Nuclear Association projects demand for uranium to rise to 130,000 tons by 2040, nearly double current demand. The world’s largest uranium producer is Kazatomprom in Kazakhstan (45 percent), followed by Namibia (12 percent) and Canada (10 percent).

Lithium carbonate prices continue to fall and are now back to price levels last seen in 2021. Ford announced on Friday it was cutting production of it F150 Lighting all electric vehicle in half due to slower than expected customer demand. Lithium production currently exceeds demand and we are now seeing forecasts of 2028 before demand again exceeds supply.

On the metals side, most base and precious metals are down from two to six percent over the last month. Sustained US Dollar strength coupled with uncertainty over Chinas growth going forward continue to hold back these metals. Pallidum is down to a six year low, having fallen for the past two years now. Pallidum is used primarily in catalytic converters for internal combustion engines and with the switch to EV’s demand for pallidum has been dropping. Palladium mine supply is a by-product of nickel mines in Russia and platinum mines in South Africa with Russia producing over 40 percent of global palladium supply. Palladium is usable in gasoline powered vehicles but diesel vehicles require platinum in the catalytic converters.

Copper prices have been trading between $3.50 and $4.00 per pound since last spring. Again US dollar strength and recession outlook have been weighing on the price of copper. Copper inventory at major Chinese warehouses has risen for the last four weeks weighing on prices. First Quantum closed their Cobre Panama copper mine due to a ruling by Panama’s Supreme Court. That mine accounts for 1.5% of global copper output. Due to that closure and the normalization of the US Dollar going forward, the Chilean Copper Commission (Cochilco) has adjusted its copper price forecast for 2024 up to 385 cents from 375 cents previously and up to 390 cents for 2025.

On the agriculture side, Brazil is the largest producer of soybean globally at 150 million metric tons. The United States is the second largest producer at 115 million metric tons. Soybean prices have moved up recently with the expectation of reduced production in Brazil this year primarily due to adverse weather. Farm Credit Canada sees soybean, canola, yellow pea, and lentil prices falling year over year with increased yields and acreage in the United States overshadowing the drop in Brazilian production.

Editor’s note: (Jan. 26, 2024): A previous version of this story misstated rate cut predictions by firms such as Goldman and Macquarie. The misstatement has been removed.

More about the author

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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