2024-05-10 Michał Kąkol 10 MIN READ
Market

Commodity trading

"Navigating the volatility of raw materials in a multi-polar economic system."

Market Dynamics Lead

Commodity trading is the exchange of raw materials that drive the global economy, spanning energy, metals, and agricultural products. Unlike the stock market, commodity markets are driven primarily by 'Physical Reality'—the actual availability and logistics of finite resources.

The market consists of two main types of participants: Hedgers (producers and consumers who want to lock in prices) and Speculators (investors who seek to profit from price movements). In today's volatile environment, commodities serve as a crucial inflation hedge and a tool for institutional portfolio diversification.

Commodity trading visual 1

The Commodity Super-Cycle

We are entering a new 'Era of Scarcity' where decades of under-investment in extraction have created a structural supply floor for many essential commodities.

Futures markets provide the liquidity, but the physical 'Off-Take' agreement is where the real power lies. Securing the physical flow of a resource is more strategic than owning a paper contact.

Commodities are the ultimate 'Real Assets'. By mastering these markets, investors gain exposure to the physical pulse of global growth, providing a necessary counter-balance to purely financialized portfolios.

1Key Points

  • Essential Takeaways
    • ·Commodities include raw materials such as corn, oil, and metals.
    • ·Every consumer has some indirect exposure to the commodities markets.
    • ·Investors can consider futures contracts, options, and exchange-traded funds, but be aware of risks.

2What are commodities? Which are traded most?

  • Commodities are typically raw or unprocessed materials, often mined or pumped out of the ground in the case of metals, crude oil, and natural gas, or grown on farms, such as corn, cotton, pork, soybeans, and wheat. For trading purposes, units of a given commodity are typically interchangeable, or fungible—one bushel of corn is considered pretty much the same as any other.
  • Many major commodities trade in the form of futures contracts on established exchanges, such as CME Group and Intercontinental Exchange, which are both U.S.-based. Crude oil is currently the world’s most actively traded commodity, according to ICE Futures U.S., with some 2.8 billion barrels changing hands each day.

3Who trades commodities?

  • There are two broad types of commodities market participants:
  • Market Participants
    • ·Hedgers, aka “commercials.” These are businesses that produce, process, ship, or otherwise handle the commodities. They trade to offload, or “hedge,” price risks to their businesses.
    • ·Speculators. This category includes banks, hedge funds, and individuals who trade for a living. They provide liquidity and help keep prices in line by exploiting efficiencies.

4What is the role of futures exchanges?

  • As with stocks, exchanges provide a centralized, regulated venue where buyers and sellers conduct business. Most commodity futures that trade on exchanges are standardized agreements (contracts). For example, one crude oil futures contract specifies 1,000 barrels of West Texas Intermediate crude, the U.S. benchmark.

5What moves commodities markets?

  • Weather and geopolitics are among several key commodity price drivers, and these difficult-to-predict factors can make commodities extremely volatile at times. A drought or flood could slash farmers’ harvests, for example. A cold snap could raise heating fuel demand.
  • In 2022, a disruption in global supplies caused in part by Russia’s invasion of Ukraine combined with growing fuel demand as the world recovered from the COVID-19 pandemic, sent crude oil soaring to multiyear highs.

6How do you trade or invest in commodities?

  • For individual investors, there are several ways to gain exposure to commodities:
  • Investment Instruments
    • ·Futures contracts. An agreement to buy or sell a certain amount at a certain price in the future. Almost all contracts are liquidated before expiration, avoiding physical delivery.
    • ·Options on futures. Put or call options based on assets like crude or gold, granting the right but not the obligation to trade.
    • ·Exchange-traded funds (ETFs). Marketable securities that trade like common stocks, linked to a single commodity or a basket.
    • ·Traditional stocks. Publicly traded companies with direct exposure (miners, oil firms) or indirect exposure (equipment manufacturers).

7What are the benefits and risks of investing in commodities?

  • Commodities can be considered “alternative” investments that are supposed to be uncorrelated, or minimally correlated, with stocks and bonds, helping to diversify a portfolio.
  • However, commodities markets are also prone to sharp, sudden price swings, with potential volatility that’s typically far greater than an S&P 500 Index stock. The fast-moving and often volatile nature of these assets is not suitable for all investors.

8The bottom line

  • We all consume commodities every day, whether by driving to work, ordering a cup of coffee, or buying clothes or supplies for home. Investing in commodities is another matter. These unique assets carry unique risks, so the wise investor will proceed with caution.

Key Analysis Themes

Physical vs. Paper Trading
Hedging & Risk Management
Global Resource Scarcity
Inflation-Linked Asset Strategy
Market Liquidity & Volatility

Market Fluidity Benchmarks

Liquidity RatingHigh
Volatility SensitivityModerate
Inflation CorrelationStrong

Global Challenges

  • 01Forecasting supply disruptions caused by weather or conflict
  • 02Managing the margin requirements of high-leverage futures contracts
  • 03Distinguishing between transient price spikes and structural shifts
  • 04Ensuring physical delivery quality in opaque global markets

Expert Advisory

Navigate complex trade corridors with institutional-grade intelligence and tactical execution.

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Strategic Takeaway

"Commodities are the ultimate 'Real Assets'. By mastering these markets, investors gain exposure to the physical pulse of global growth, providing a necessary counter-balance to purely financialized portfolios."