Commodities

Commodity trading mainly involves globally traded goods and raw materials such as crude oil, agricultural products and metals. These goods are standardised and interchangeable: a barrel of a particular grade of oil is the same as any other barrel of that grade. The main groups are:

• Energy: for example crude oil, with Brent and WTI as the best-known benchmarks, and natural gas
• Metals: precious metals such as gold and silver, and industrial metals such as copper and aluminium
• Agricultural products: for example wheat, corn, coffee, sugar and cocoa, as well as livestock

How do traders trade commodities?

Compared with shares and currencies, trading physical goods directly has become largely irrelevant for private traders and is rather impractical, as it involves storage, transport and insurance. Instead, private traders usually turn to derivatives on the commodity they want to trade, such as futures, options or CFDs, or to exchange-traded products. Most commodities are priced in US dollars.

Example: a trader buys a CFD position on 100 barrels of crude oil. If the oil price rises by $2 per barrel, the position gains $200; if it falls by $2, it loses $200, regardless of how small the margin deposited was. Because commodity prices can move sharply, leverage magnifies both gains and losses.

What moves commodity prices?

Commodity prices depend on supply and demand, which are influenced by factors such as weather and harvests, production decisions by major producers, inventories, geopolitical events, global economic growth and the strength of the US dollar. Commodities can therefore be very volatile. They matter to forex traders as well: the currencies of major commodity exporters, such as the Australian dollar, the Canadian dollar and the Norwegian krone, often react to price changes in their key export goods (see foreign exchange).