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The commodity market focuses on assets that are used in people’s everyday life, where the prices have become commoditized. This means that the price is basically the same in nearly every location across the globe if you exclude transportation. Commodity products include energy prices, such as crude oil, gasoline and natural gas. Grains are also considered commodities. Foods such as wheat and corn and soybeans make up the bulk of commodity trading throughout the globe. Both precious and base metals are considered commodities. Gold, silver platinum and palladium are liquidly traded, while base metals such as copper, aluminum, nickel and zinc has relatively active markets.
The best way to learn about commodity trading is to learn what they are and why they move. Supply and demand are generally the long-term drivers of commodity prices, which is a function of global economic growth and supply constraints.
The demand side of the equation for specific economies is a function of economic growth. As economies grow, the demand for energy increases as manufacturing and shipping increase. Growth also propels the use of base metals as housing and commercial real-estate expand. Prosperity increases global trade, which in turn increases the volume of grains and soft commodities that are required to satisfy growth.
The supply side of the commodities equation is focus on production. Supply disruptions that can come from geopolitical events or weather damage and are reasons why supply might be tighter than normal. For example, if there is civil war in Saudi Arabia the world’s largest oil producer, oil production will likely be curtailed sending prices higher. If the weather is dryer than normal ahead of the harvest season in the U.S., corn and soybean prices might climb as traders price in a smaller than expected harvest.
The Most Liquid Commodities
The commodities that experience the most active trading is oil and gold. Other energy sources such as heating oil, gasoline and natural gas follow. Silver, is also liquid followed by platinum and palladium. Since oil is the most liquid it is generally the most actively traded.
There are several ways that traders evaluate the future direction of energy commodities. One of those ways is through fundamental analysis. Traders can track the supply and demand balance in the United States, which is the world’s largest consumer of energy. The U.S. consumes more than 20-million barrels of crude oil a day more than double its nearest competitor. The U.S. also produces nearly 10-million barrels a day, just behind Russia and Saudi Arabia.
Weekly data that describes inventories along with imports, exports and demand is released by the Department of Energy in the United States. Each week, analysts estimate their forecasts for inventory levels, and markets generally move if the estimates do not match the actual release. You can find this type of information at the Department of Energy’s web site.
By combining fundamental information with supply side production in conjunction with economic growth, you can formulate your view of where commodity price might head.