Commodity Markets: September Growth Influenced by Geopolitics and Weather Conditions

September has passed, marking the end of the third quarter. And what a month it was! Commodity markets strengthened by 4.4 percent in September. The main drivers were dry Brazilian weather, warm finishing weather in the U.S., the FED’s significant rate cut, Chinese incentives, and a surge in trader purchases. This was the best month for the Bloomberg Commodity Index since July 2023 and the best month for the Bloomberg Ag Index since February 2022.

Several Important Events

On a monthly level, energy prices fell while non-energy commodity prices rose in September. Energy prices dropped by 7.1 percent in September, driven by a decline in crude oil (-7.3 percent) and European natural gas (-4.8 percent). Non-energy product prices increased by 2.3 percent. Agricultural product prices rose by 2.8 percent, and food prices by 3.1 percent, primarily thanks to corn (+8.6 percent) and wheat (+7.5 percent). Fertilizer prices fell by 1.1 percent. Metal prices increased by 1.8 percent, led by rising aluminum and zinc (both +4.5 percent) and copper (+3 percent). Precious metals rose by 4.3 percent.

This week, several events are noteworthy that are crucial for the movement of commodity markets. On Wednesday, the minutes from the last FED meeting will be released. This always analyzes whether there are any hidden messages between the lines that could hint at the FED’s next moves. Then on Thursday, we expect new data on CPI inflation in the U.S. Inflation is expected to be at 2.3 percent; the lowest value in the last three years. And then on Friday, to wrap up the week, a new WASDE report on crops. This report will help determine the directional trend of crop prices in the U.S. until the end of the year.

Geopolitical tensions over the weekend were likely a bit calmer than expected, but many fears remain. The dollar has returned to focus as one of the safe havens during increased market fear. Therefore, it is not surprising that it is strengthening and has broken below the 1.10 level against the euro. The market fears that Powell will slow down interest rate cuts, while Lagarde seems more decisive. Based on these ideas, the dollar has recovered. The dollar further strengthened after Powell’s speech, in which he stated that he is in no hurry to lower rates and that the FED will likely continue to reduce the cost of money by 25 basis points.

Just when the futures price of oil was dancing on the edge of the $70/bbl mark, as is often the case, something happens that turns the trend and everything else in the market. Thus, futures prices jumped more than 8 percent last week, all due to the renewed escalation of conflict in the Middle East (just when it seemed like the situation was calming down). The trend has spilled over into the start of the new week, so the Brent crude futures price is currently above $81/bbl, and WTI above $77/bbl. The largest weekly price jump in over a year is a result of Iran’s attack on Israel. Now we are waiting to see what Israel’s response will be, and the U.S. is supporting them in this regard (although it does not support attacks on Iranian nuclear sites). Will Israel then attack Iranian refineries or the main export terminal on Kharg Island to reduce Tehran’s export revenue? If Israel attacks, Iran will likely retaliate with strikes on Israeli energy and gas facilities, and thus we enter a negative spiral. By the way, Iran is a member of OPEC and produces about 3.2 million barrels per day, which corresponds to about three percent of global production.

‘Agricultural Markets on the Defensive’

Futures prices of European natural gas hovered around €40.5/MWh, close to the highest level in 10 months, as concerns grew over the escalation of conflict in the Middle East. Oil prices also rose to their highest levels in 6 weeks due to fears that Israel might target the Iranian oil industry following Tehran’s recent missile attacks. Despite geopolitical uncertainty, robust European gas storage, currently at 94.4 percent capacity, is expected to limit significant price spikes.

Agricultural markets are on the defensive ahead of a key week for inflation data and a new USDA report on grain production. Key bearish factors are at play: a strong U.S. dollar, accelerated harvest progress in the U.S., active sales of agricultural products in the U.S., and better weather prospects in Brazil. Funds have covered their short positions over the last six weeks, and their current short position is the smallest since November 2023. At the end of a lively week in the grain market, Friday ended with a traditional profit-taking on futures markets on both sides of the Atlantic. Geopolitical, climatic, and commercial concerns, especially around the Black Sea, remain high. However, due to a lack of new elements on this topic, selling pressure is once again taking the lead. The decline has, however, been mitigated by the EU/USD ratio falling below 1.10 for the first time in almost 2 months.

U.S. stocks are in line with expectations for wheat and lower for corn and soybeans, but all are significantly above those from 12 months ago. Corn stocks are estimated at 44.7 million tons (2.1 million tons less than expected, but 29 percent more than in 2023), soybean stocks are estimated at 9.3 million tons (0.3 million tons less than expected, but 29 percent more than last year), while wheat stocks are estimated at 54.4 million tons (an increase of 12 percent compared to last year).

In the EU, the situation is currently quite negative: weak harvests, poor quality, and health safety of corn, reduced supply from Ukraine, and a lack of producer supply. In the medium term, the polarization East-West could shift the export of U.S. agricultural products from China to the EU, and consumption could fall.

Copper futures prices stabilized around $4.5/lbs after increased volatility last week, with trading volume remaining subdued as Chinese markets are still closed due to a week-long holiday. Last week, the metal lost half a percent for the first weekly decline since early September. These moves followed as traders took some profits after copper prices reached a four-month high, while escalations of tensions in the Middle East prompted markets to offload riskier positions in favor of safe assets. Nevertheless, Chinese economic stimulus measures continued to support market sentiment amid hopes for greater demand from the largest metal consumers. Moreover, the prospects for further interest rate cuts in the U.S. that could stimulate global economic activity added to the optimistic outlooks.