This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
Commodities are the basic building blocks of the global economy, upon which most other goods are created. They fall into two broad categories. ‘Hard’ commodities are natural resources that must be mined or extracted. These include energies such as oil and natural gas, and metals such as gold and aluminium. ‘Soft’ commodities, on the other hand, are agricultural products such as crops and livestock.
Commodity markets are popular with traders because prices can be very volatile, meaning there are often opportunities to profit by going long or short. Factors that can affect pricing include consumer trends, weather patterns, infrastructure, government policies, economic performance, reserve levels and currency valuations, among others.
What are the most traded commodities?
The top ten most traded commodities in the world are:
- Brent crude (oil)
- WTI crude (oil)
This is based on an analysis of the top 40 most exchanged agricultural, energy and metal futures contracts of 2017, using figures from the Futures Industry Association (FIA).
1. Crude oil: Brent crude
Crude oil is one the world’s most in-demand commodities as it can be refined into products including petrol, diesel and lubricants, along with many petrochemicals that are used to make plastics. Brent crude is one of the two major types of oil used to benchmark global prices, along with West Texas Intermediate (WTI). It is a high-quality ‘sweet light’ oil, meaning it has a low sulphur content and density, and is therefore relatively easy to refine into usable end products. It is drilled from oil fields in the North Sea’s Brent, Oseberg, Forties and Ekosfisk fields, off the shores of the UK and Norway. This proximity to the coast makes it relatively cost effective to transport internationally.
Like all commodities, the price of Brent crude is dependent on supply and demand factors. Historically, demand for oil has been correlated with global economic performance. Prices generally rise during boom periods – as more oil is needed to manufacture and transport products – and fall during economic slowdowns. On the supply side, global supplies of oil – rather than the supply of Brent crude specifically – has the most influence over this commodity’s price. Here the Organisation of the Petroleum Exporting Countries (OPEC), which sets production quotas for member countries, has historically had a great deal of influence. However, this has waned in recent years as the US, which is not an OPEC member, has increased shale production. Learn more about the history of crude oil.
Steel is an alloy of iron and carbon that often includes other elements such as manganese, chromium, nickel and tungsten. It is an important commodity because it is extremely strong and relatively low cost, making it suitable for industrial uses in construction, infrastructure and manufacturing.
As a result, steel prices have historically been fairly well correlated with global economic performance – generally rising and falling in line with economic output. However, as an alloy, its price is dependent on the cost of its constituent products and the costs of shipping them. In recent months, prices have also been heavily influenced by Trump’s trade war with China, which has seen the president impose tariffs on non-US steel.
Its composition can vary substantially dependent on the desired end use, so there is no agreed standard for the alloy. As a result, there are multiple futures contracts for steel, which can make it difficult to trade. With IG, you can trade steel indirectly by speculating on constituent commodities, particularly iron ore.
3. Crude oil: West Texas Intermediate (WTI)
West Texas Intermediate (WTI) crude – referred to as US crude on IG’s platform – is the second type of crude oil on our list. It is another high-quality ‘sweet light’ oil, which has an even lower sulphur content and density than Brent crude. WTI oil is drilled in various US states – including Texas, Louisiana and North Dakota – and sent to Cushing, Oklahoma for price settlement.
In the past, prices of WTI oil have been heavily dependent on US consumption. This is because Cushing is a landlocked area, making it difficult to transport oil internationally and leading to a divergence in the cost of WTI and Brent crude barrels. However, the recent reversal of the ‘Seaway Pipeline’ to take oil from Cushing to Freeport, Texas (on the Gulf of Mexico) – instead of in the opposite direction – has made it easier to export this commodity, which has generally seen prices more closely correlated with Brent crude.
Soyabeans – known in the US as ‘soybeans’ – are an important commodity, primarily because they are rich in protein and relatively cheap to produce. They are used to make a variety of food and agricultural products, including soyabean meal (animal feed), soyabean oil, and meat and dairy substitutes such as tofu and soy milk. They can also be used to produce biodiesel. The majority of soyabeans are grown in the US, followed by Brazil, Argentina, China and India.
Soyabean prices can be affected by demand for animal feed, biodiesel, and meat and dairy substitutes, along with factors that could affect supply such as unusual weather conditions. As the US is a major producer, prices can also be influenced by the strength of the US dollar – generally rising in price (nominally) as the US dollar falls and vice versa. In 2018, speculation about Chinese tariffs on US soyabeans – and their eventual implementation – also had a dramatic impact on prices.
5. Iron ore
Iron ores are the rocks and minerals from which iron can be extracted. The vast majority of iron ores are used to produce pig iron, which, in turn, is fed into steel production. However, extracted iron can also be used to produce cast iron, magnets and catalysts for various industrial and chemical uses.
Iron is a very bountiful commodity and is relatively easy to mine. This has meant that historically there has normally been sufficient supply to meet demand, and that prices have been relatively stable. However, since 2000 there have been significant fluctuations in price due to changing Chinese consumption. The country has rapidly urbanised – requiring vast amounts of steel – and experienced phenomenal economic growth. Because of this, Trump’s tariffs have also had an indirect effect on iron ore, with prices falling due to a reduction in demand.
Corn – also known as ‘maize’ – is an important soft commodity. It is a food source that is used primarily to produce animal feed, ethanol, corn syrup and starch. There are several varieties of corn – the main ones being dent, flint, pod, popcorn, flour and sweet corns. The majority of corn is grown in the US, followed by China, Brazil and Argentina.
Much like soyabeans, the price of corn is heavily dependent on the demand for animal feed and biofuels, as well as the strength of the US dollar and weather patterns. Agricultural subsidies – particularly US subsidies – can also have an effect on prices. Corn production is currently heavily subsidised in the States, which provides a strong incentive for production and helps maintain global supplies.
Gold is a precious metal that has been highly sought after for millennia, due to its metallic yellow colour and sheen. Nowadays it is primarily used for jewellery production and as an asset for investment. However, a small amount is also used in industry as it is highly resistant to most chemical reactions and conducts electricity. The majority of gold is mined in China, followed by Australia, Russia and the United States.
Gold is widely considered to be a ‘safe-haven’ asset, as it tends to hold its value or rise in times of economic and political uncertainty. For this reason, many traders move money into gold when the dollar is falling, so gold’s price often has an inverse relationship with the value of the dollar. Find out more about the factors that influence the price of gold.
Copper is an important base metal because it is an exceptionally good conductor of both heat and electricity, and is also corrosion resistant and weatherproof. It is primarily used to manufacture electrical wire, pipes, roof tiles and industrial machinery. However, it is also used to produce alloys including brass and bronze. Copper is primarily mined in Chile, followed by China, Peru and the US.
Because of its many uses in industry and electronics, the price of copper can fluctuate significantly in line with economic output. Supply, on the other hand, can be affected by trade disputes, seasons and infrastructure concerns – particularly within key South American suppliers such as Chile and Peru.
Aluminium is another important base metal, one that is exceptionally light and corrosion resistant. It is often combined with other elements – such as copper, zinc and magnesium – to form alloys that are both strong and light. For these reasons, aluminium, and alloys containing it, are useful for commercial applications including the manufacture of vehicles and planes, packaging (eg cans) and construction. The majority of aluminium is produced in China, followed by Russia, Canada and India.
The price of oil and electricity can affect the price of aluminium, as separating the element from ores is very energy intensive. Demand is driven by manufacturing and construction, so economic developments in economies such as China can have a big effect on its price. And, once again, this is a commodity that was singled out for tariffs by the Trump administration this year – so US policy is likely to play a role in pricing aluminium.
Silver is the second precious metal on our list, and is another element that has been highly sought after for thousands of years. Unlike gold, roughly 50% of demand for silver can be attributed to its industrial uses, which include solar panels, photographic films and electrical contacts. Like gold, however, a large proportion of demand for silver is also driven by jewellers and investors.
Silver is also considered a ‘safe haven’ asset, so its price will often rise during times of economic uncertainty. However, gold is often seen as a more reliable investment because its price is less dependent on demand from industry, which often takes a hit when economic output falls. On the supply side, silver is most often extracted from the ores of other metals – particularly copper – so fluctuations in demand for these other elements can affect silver’s price. Find out more about the factors that influence the price of silver.
How to trade commodities
One of the key takeaways of this piece is that every commodity is different. The factors that affect oil prices, for example, are very different to the factors that affect gold’s price. For this reason, it is very important to carry out a thorough analysis of your chosen market before placing a trade, taking into account all the factors that could affect the underlying commodity’s price.
Learn about commodities trading with IG.