The very ability to store a particular commodity is what makes for the commodity price volatility. In any extreme cases where the commodity doesn’t allow for immediate storage prior to delivery for instance electricity, there is no denying the prices are going to get volatile. Speaking on the same line, we have natural gas accompanied with oil which demands special infrastructure for immediate storage, the volatility is deliberately low. This is when there is ready availability of inventories. However, any such constraints on infrastructures attract spikes.
Inventory constraints affecting commodity
When we talk capacity constraints, commodities like agriculture and metal take singular and different stances when put against energy. When dealing with metals, you need basics in place, parking lot coupled with a fence, preferably chain linked. Such a structure allows you to store metals stacked up as high as possible. As such, non-energy commodity offers chances for low volatility barring the time when spikes take place, owing to depletion of inventories. By fair competition, Crude Oil commodity trading is definitely the most volatile commodity that one can possibly deal with. And it’s not for nothing that petroleum is often referred to as the black gold since it’s easily regarded to be one the most expensive commodities to trade as well.
The determining cost curve
The cost curve for commodity and the very steepness is also a determining factor for commodity volatility. The cost curve varies from one commodity to another which in turn greatly relies upon the very features of its production operandi. A fine instance, in this case, would be iron ore that generally throws in a curve that is all the steep. Now, as long as the price is kept high, the entire cost curve will be in play. It is noteworthy in this case that the iron ore is highly sensitive to the demand-supply shifts which again plays an important role in imparting its volatility. Any steady decline in demand has a direct impact on the market growing resilient towards the producers (high costing) and so the price of the commodity takes a heavy drop. By all means, such producers are left out of the scenario as they fail to satisfy any recurring demand down the line.
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