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As the essential components behind just about every other product imaginable, commodities are as vital as they are volatile. Find out how these invaluable natural resources fit into the wider trading world.
|Introducing commoditiesCommodity terminologyCommodity speculationCommodity futuresWho trades commodities?|
Commodities trade on a number of regulated futures exchanges that specialise in particular markets. These include:
The largest trading floor for commodities in Europe, among other products.
Speciality: agricultural commodities.
Trades: cocoa, wheat, coffee, sugar, corn.
The world’s leading non-ferrous metals market.
Speciality: metals that do not contain iron.
Trades: aluminium, copper, tin, nickel, zinc, lead, aluminium alloy, cobalt
The world’s largest physical commodities futures exchange – owned by CME Group.
Speciality: energy contracts and metals.
Trades: crude oil, natural gas, heating oil, RBOB unleaded gas, gold, silver, copper, platinum, palladium.
A leading global soft commodities futures and options exchange.
Speciality: soft commodities.
Trades: sugar, cotton, cocoa, coffee, orange juice.
The world’s oldest futures and options exchange – owned by CME Group.
Trades: corn, soybeans, soybean oil, soybean meal wheat, oats, rough rice.
Commodities futures trade in contracts. Each product has a standard size, set by the futures exchange that it trades on.
Let’s take gold as an example. The contract size for gold futures is 100 troy ounces. So if you buy one contract of gold, your exposure is worth 100 troy ounces of gold. If the price of gold increases by $1 per troy ounce, this will increase the price of your gold by $100 ($1 x 100 troy ounces).
You’ll need to check the contract size of the commodity on which you’re trading, as most of them have different standard contract sizes. We also offer mini contracts to complement the standard sizes available.
As a leveraged product, when buying contracts on commodities you’re not required to put up the full value of your position. Instead, each commodity will have a set margin amount per contract.
To find out more, please visit our leverage module.
Contango and backwardation are terms to describe the shape of the futures price curve for a particular commodity over the coming months. The futures price curve shows the price of a futures contract according to the amount of time it runs for.
Contango occurs when future prices are higher than the current spot price, so the forward curve slopes upwards. As you approach the contract end date, the gap between the spot price and the future price would decrease, so the curve would converge back towards the spot price.
Backwardation occurs when forward prices are lower than the current spot price, so the forward curve slopes downwards. As you approach the contract end date, the gap between the spot price and the future price would decrease, so the curve would converge back towards the spot price from below.
In normal market conditions, you would expect commodity futures to be trading in contango. This is because the forward price includes fees for holding the position, so it should be theoretically higher the longer into the future it runs. For some commodities, however, geopolitical factors tend to play a much more important role in whether the curve is in contango or backwardation.
The shape of the futures curve is important to commodity hedgers and speculators, as it gives an impression of the state of the commodity in the market both now and in the coming months. A state of backwardation, for example, can suggest a shortage in supply which hikes the current price up, or an expected plentiful supply in the coming months likely to bring the future price down.
For example, if crude oil futures markets are in contango, this suggests that the current supply is plentiful. Conversely, if prices were in backwardation it could suggest an immediate shortage. Economic events that threaten the steady global flow of oil, such as war, tend to tip the market into backwardation.