Commodities: markets reference

Commodities are raw materials or primary agricultural products that are largely uniform in quality regardless of who produced them, which allows units from different producers to be traded interchangeably. They are generally divided into energy commodities such as crude oil and natural gas, metals, which include precious metals like gold and silver as well as industrial metals like copper, and agricultural commodities such as wheat, corn, soybeans, coffee and sugar. Because a commodity is a physical good, its exchange contract specifies a standard quality grade, quantity and, for physically settled contracts, a delivery location and date.

Commodity futures trade on specialised exchanges such as CME Group and its NYMEX and COMEX divisions in the United States, ICE Futures in Europe and the US, and the London Metal Exchange, which specialises in industrial metals. Many commodity futures trade on an electronic platform for close to 24 hours across the business week, with a short daily maintenance break, rather than a single fixed local session like a stock exchange. Trading activity often concentrates around the hours when the relevant physical market, such as US oil inventories or European gas markets, is most active.

Producers, such as oil companies, mining firms and farmers, use futures contracts to lock in a price for goods they will sell in the future. Consumers of raw materials, including airlines, food manufacturers and utilities, use the same contracts to fix costs for goods they will need to buy. Commercial trading houses buy, store and transport physical commodities and use futures to manage price risk on their inventories. Financial participants, including hedge funds, commodity trading advisors and index-tracking funds, trade futures without any intention of making or taking physical delivery of the underlying goods.

A commodity futures contract is quoted per standard unit, such as US dollars per barrel for crude oil, US dollars per troy ounce for gold, or US cents per bushel for wheat. Each contract specifies a fixed quantity, for example 1,000 barrels of oil or 5,000 bushels of wheat, and a delivery month. Prices for different delivery months on the same commodity, known as the futures curve, can differ, reflecting expectations about storage costs and supply and demand at each future date. Spot price refers to the price for near-immediate delivery.

A futures contract is a standardised agreement to buy or sell a set quantity of a commodity at a set price on a future date. Contango describes a market where futures prices for later delivery months are higher than the spot price, while backwardation describes the opposite. Physical settlement means the contract ends with actual delivery of the commodity, while cash settlement pays the price difference instead. Open interest counts the number of outstanding futures contracts that have not yet been closed, delivered or expired, and is used as a general measure of market activity.

Commodity prices can move sharply on weather events, geopolitical disruptions to supply, changes in production quotas and shifts in industrial demand. Futures trading involves leverage, since a trader posts only a fraction of a contract's full value as margin, which magnifies both gains and losses. In the United States, the Commodity Futures Trading Commission regulates futures markets and exchanges such as CME Group; in the European Union and United Kingdom, commodity derivatives fall under MiFID II and FCA rules respectively. This page describes how commodity markets function; it does not forecast prices or recommend buying or selling any contract.