In 2021, prices have been rising left and right whether we like it or not, and the blame can be pinned on the COVID-19 pandemic along with the new variants of the virus that appear on a quarterly basis these days. The supply chain is jumbled up, making citizens pay more for things like breakfast cereal, and commodities especially face the same struggle. After hitting negative prices for the first time, oil has reached prices we haven’t seen since 2018, and natural gas has seen a similar rise. Less-traded commodities like wheat and lumber have also realized this spike, with virtually no commodities immune to this. High commodity prices aren’t bad, but you obviously don’t want it too high.
We listed the major cause for the increase in commodity prices, but analysts have started to notice another trend. In this case, it’s the effect of bad weather on prices. This has always been a factor when it comes to valuing commodities, but severe weather is unfortunately becoming more severe every year, and 2021 was no exception. In February, the state of Texas and other neighbouring states were hit with Winter Storm Uri, which froze the state and killed the power grid. This led to a rise in prices for natural gas as demand skyrocketed while production took a hit. Surrounding states like Louisiana faced less severe temperatures, but enough to affect gas trading. Later in the summer, natural gas got hit again as record temperatures were hitting North America, causing a spike in demand for electricity to power air conditioning. This heat problem spread around the Northern Hemisphere as a whole, creating a global problem as wildfires affected lumber prices too. More recently, the landfall of Category 5 Hurricane Ida in the Gulf Coast States killed most of the area’s natural gas output, which led to rising prices in multiple different things like electricity and fertilizer. There are countless other examples globally, but there is the point of empiric evidence here. Severe weather occurs every year, but prices don’t usually rise like this, which lays the case for this year being an outlier. However, we do know it has an effect, and global warming will make it more severe, whether we like it or not, making this problem activist investors are looking to address in their companies, with Sherwin Williams being one that has made changes to their business. Do you believe weather will have a greater effect on commodities in the future?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.