How can geopolitical events affect commodity prices?

Geopolitical events can significantly impact commodity prices primarily through disruptions in supply chains and shifts in market sentiment. For instance, conflicts, wars, or political instability in key producing regions may hinder the extraction, transportation, or sales of commodities like oil, gas, or grains. This disruption in supply can lead to shortages, driving prices up due to increased scarcity.

Additionally, geopolitical events can alter market sentiment, influencing trader behavior and investment decisions. For example, if traders perceive that a region rich in resources is unstable, they may act by buying commodities as a hedge against potential future supply disruptions, further inflating prices. Conversely, peace or stability in a region may lead to increased production and supply, potentially lowering prices as the market reacts to the improved conditions.

This option highlights the dual impact of both tangible supply issues and the psychological aspects of trading, which are crucial in understanding how geopolitical factors affect commodity markets. The other options do not capture the dynamic and multifaceted nature of the relationship between geopolitical events and commodity prices as effectively.