Commodities Update: Lumber Prices and Oil Prices – June 2023

Commodity prices have been all over the place for the last few years due to the constant economic changes, from a pandemic to soaring inflation. With fears of a global recession and many other unique factors, there are many concerns over what will happen to commodity prices next.

In this article, we’ll break down some recent news impacting commodities, including high mortgage rates keeping lumber prices low and OPEC+ cutting oil production.

Key Takeaways

• Lumber prices are tied to interest rates because home sales decrease when average mortgage costs become unaffordable
• After fears of a Western banking crisis, OPEC+ recently announced further reductions in oil production, anticipating weakened demand
• Commodity prices impact many industries, from travel to real estate, with consumers tending to feel the impact the most

Recent Trends in the Commodities Markets

Oil and lumber prices have been all over the place the last few years due to extreme fluctuations in consumer demand. In 2022, OPEC+ production cuts caused some of the fluctuations in oil prices. The group of oil-exporting countries was responding to global concerns about rising inflation and the conflict in Ukraine.

Writing a current piece on commodities is always challenging because the prices often fluctuate, as well as which industries feel the most impact. Still, here’s a recent update on what’s happening to lumber and oil prices. We’ll discuss the recent surprise production cuts announced by OPEC+ and give background on where prices have been this past year.

Lumber Prices Background

Lumber prices have been all over the place the last few years due to confusing supply and demand issues during the pandemic. Prices reached $1,515 per thousand board feet in the spring of 2021, a massive increase from $350-$500 pre-pandemic.

Lumber prices dropped rapidly in June 2021 for a few reasons. Demand decreased as families went on vacation rather than renovate their homes, and supply increased, allowing builders to meet demand more efficiently.

Lumber prices typically move in a smaller range week-to-week, though. For example, prices increased in October of 2022 by about 26% from the lowest point in September, reaching around $530. This was up from a low of $413 per thousand board feet the previous month, a 76% decline from the record high in May of 2021 when demand for the commodity surged.

Why did lumber prices increase in October? Many experts argued it was due to an oversold rally – a positive bounce in prices after a sell-off bringing the security below its true value. Most people believed prices would decline in the future as rate hikes continued to impact the housing market and discretionary spending.

Lumber prices have declined in the last year. In April 2022, prices were above $1,000 per 1,000 board feet and have since cooled to around $400.

Oil Prices Background

Brent crude futures dropped to around $85 a barrel in October 2022. The OPEC alliance announced it was cutting production by two million barrels per day the same month, citing global economic uncertainty, high inflation, and concerns over future demand.

Leading up to the fall of last year, oil prices had steadily climbed throughout 2021 as COVID vaccination increased, pandemic restrictions loosened, and demand for oil began outpacing supply. This came after oil prices hit shocking lows –below $0 per barrel – at the pandemic’s start.

It was also in October of last year that President Biden announced the US would release 15 million barrels of oil from the Strategic Petroleum Reserve. The oil sales from the reserve were initially supposed to happen through November. However, the Biden administration extended them to December. The president did this to increase the oil supply and drive down prices.

It’s worth mentioning the first release from the reserves was approved in March of 2022 when there were inflationary shocks from the Russian invasion of Ukraine. These releases brought the US strategic petroleum reserve (SPR) to 434.1 million barrels in September of 2022, the lowest level it had reached since 1984.

The drop has continued, with the weekly ending stocks of crude oil in the SPR now under 370 million barrels.

Oil prices were a significant topic of discussion leading up to the US midterm elections in November. Gas prices often play a defining role in the outcome of elections since voters deal with the effects of inflation daily.

What Drives Supply/Demand Changes?

The real estate market often influences lumber prices, and the economy in general influences the real estate market. When the Fed raised rates in September 2022, lumber prices dropped instantly since many were worried about what the combination of soaring inflation and constant rate hikes would do to the housing market. Housing market declines mean fewer new home starts, meaning people aren’t as eager to complete home renovations.

The pandemic saw a unique shift in consumer spending as folks realized that since they were at home all the time, they might as well work on DIY projects around the house.

Consumer spending habits have also changed multiple times over the past few years. People went from living with pandemic restrictions to loosening restrictions, which led to many changes in behavior. With fewer restrictions, consumers spent more money on dining and travel, eager to return to the outside world.

Do Oil Prices and Lumber Prices Have a Stable Outlook?

There appears to be plenty of instability regarding future oil and lumber prices as both have to deal with recession concerns and other global factors.

Over the last month, lumber prices have slightly dropped as interest rate hikes continue holding investors back. With high mortgage rates, many folks are simply priced out of the real estate market, so they can’t purchase a home, let alone consider renovating. With the average 30-year fixed mortgage rate currently sitting at 6.27%, this will continue to affect the price of lumber for the foreseeable future.

When it comes to oil, many global issues will continue to impact prices. OPEC+ recently announced another round of oil production cuts of around 1.16 million barrels per day, taking many countries by surprise. Cuts in oil supply drive the price of barrels up, which the US government has expressed dissatisfaction with.

The unprecedented global events of a pandemic and war have led to fluctuations in oil prices in recent years. Prices went into the negatives at the pandemic’s start and then shot up to over $100 per barrel early in 2022.

Here are the most important things to consider with the future of lumber and oil prices.

How Will Consumer Spending Habits Shift If There’s a Recession?

A recession can impact everyone in the economy since everything slows down to restore the balance of supply and demand. We must see whether consumers continue to spend on home renovations and travel.

What Will Happen to the Supply If the Demand Decreases?

As we saw during the pandemic, when demand for commodities decreased, it led to a slowdown in the production of oil and lumber. Then when the restrictions were lifted, companies weren’t ready to keep up with the increased demand. If demand drops, producers of lumber and oil typically adjust to reduce supply.

Investing in Oil and Lumber Stocks

Home retailers are often the first to feel the impacts of raising rates and fluctuating lumber prices. What we know for sure is that fluctuating commodity prices impact many industries.

Here are the industries most impacted by oil prices:

• Oil companies. Oil and natural gas companies have had profitable years due to the increased prices.
• Airlines. Airlines rely on oil for business operations and feel fluctuating prices’ impacts.
• Transportation. The costs of transporting people are contingent on oil prices.
• Logistics and delivery services. When oil prices go up, it can cause supply chain issues as everything becomes more expensive to transport.

Here are the industries most impacted by lumber prices: 

• Home construction. Home building is directly tied to the costs of supplies like lumber.
• Mortgage industry. When lumber prices are high, people are less likely to apply for a mortgage or borrow money for a DIY project.
• Sawmills. Mills have to find the perfect balance to match lumber demand with production. When the prices of lumber fluctuate, the mills must make the necessary changes. Labor shortages and supply chain issues affect lumber prices and distribution.
• Home improvement retailers. Home DIY projects tend to decrease when the cost of supplies increases.

If you’re looking to invest in oil or lumber, you’ll want to start by researching companies in these industries. However, investing in stocks in the commodities sector can be pretty risky right now. Even with inflation cooling off and the Fed hopefully ending its series of aggressive rate hikes this year, these investments are risky due to their volatility.

The Bottom Line

Oil and lumber prices are volatile and dependent on changes in supply and demand. When consumers have more discretionary spending and are interested in renovating their homes, lumber prices tend to increase as demand increases. Similarly, demand for oil hit record low levels during the pandemic, leading oil suppliers to cut production significantly and prices to drop below $0.

Oil prices have steadily increased in the past month as OPEC+ announced another production cut. Lumber prices have remained relatively constant and low, with mortgage rates still high and consumer need for renovations minimal.

We will continue tracking commodity prices as the world worries about a pending recession. If inflation doesn’t cool off, rate hikes will likely continue, adding further volatility to commodity prices. We’re hopeful things will stabilize in the coming months, but only time will tell.

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