How Does Weather Affect Commodity Prices?

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Weather impacts our daily lives and the overall economy alike. Since commodities are tangible produce — such as crops, oil and metals — production can be either compromised or bolstered by the weather. Extreme weather conditions can affect all weather-driven commodities and should be factored in when it comes to trading:

Oil & Gas: Undeniably, consumers, especially those residing in the Northern parts of the world, use more heating oil and natural gas in the winter. But people also drive less during colder winters, so they use less gasoline. So it all comes down to a strange pendulum: heating oil and gas spike during colder months, while gasoline tends to rise in warmer seasons.

Weather forecasts can also affect oil and gas prices. If forecasts are pointing to a colder-than-normal winter, oil and gas prices may rise, as investors anticipate increased demand. Another weather factor that may affect oil prices are natural disasters and specifically floods. Floods and intense hurricanes can cause damages to pumping and refinery equipment and may even cause some production stations to temporarily stop their operations and close down. This will in turn lead to a decrease in supply, which if sufficient enough, can cause oil prices to rise. That being said, it is important to note that there are a number of other factors that can affect oil prices such as production cut decisions by OPEC (Organization of the Petroleum Exporting Countries).

Crops: Commodities can also be impacted by bad weather – this is particularly true for crops such as coffee, corn and sugar to name a few. Early snow for example will drive natural gas commodity prices higher and make it all the more expensive for commodity industries to fuel the electricity needed for their operations, local businesses may be closed and crop production can be reduced. This decrease in supply can in turn lead to higher commodity prices. On the other hand some commodities, like sugar and rice can benefit from favorable weather conditions such as increased rainfall which would lead to an increase in production and oftentimes a drop in the commodity’s price value as this time supply exceeds demand.

Retail Stocks: It is evident that the weather can produce a chain reaction effect on the value of certain assets. Stocks prices are usually not affected by adverse weather phenomena but there are some extreme case scenarios. Very bad weather such as prolonged blizzards, snowstorms or floods can cause increased damages to storages and factories causing companies immense damages which can in turn have an impact on the company’s stock. That being said, it is important to note that it is virtually impossible to predict whether a Toyota factory for example will be wrecked by a flood and whether that would be significant enough to affect its stock price.

Sources: investopedia, forexcrunch, investorplace

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