Commodities Articles

Article / Updated 10-06-2022

Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts. In 2007, the Chicago Mercantile Exchange (CME) merged with the CBOT as part of a great consolidation wave. CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains. CME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world). Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on Globex, an electronic trading system. In 2008, the CME went on a series of acquisitions and purchased the NYMEX and COMEX. The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its website, which also includes helpful tutorials on all its products.

Article / Updated 08-16-2022

Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading. The Wall Street Journal For daily intakes of financial news, nothing beats The Wall Street Journal. If you want to be a successful trader, you need to keep abreast of all the information that’s worth knowing. The Journal does a good job of presenting solid analysis and in-depth coverage of the day’s main events. Its coverage of the commodities markets in its online edition is actually fairly extensive, with interactive charts and graphs for both cash prices and futures markets. Also, keep an eye out for the section “Heard on the Street”. It includes a wealth of information to help you develop winning strategies. Bloomberg The Bloomberg website at is one of the best sources of raw information and data available to investors. Visiting this site once a day keeps you up on important developments in the markets. The website’s commodity section contains comprehensive information on all the major commodities, including regular price updates on the futures markets. If you trade futures, this is an indispensable resource. Nightly Business Report Tune in every weeknight to your local PBS network to watch NBR’s Paul Kangas, Susie Gharib, and the gang analyze the day’s events. Their special features are insightful, and the market analysts they bring in are usually knowledgeable about the issues at hand. Plus, it’s commercial free! Check your PBS station for local listings. Morningstar Morningstar has a plethora of information on the latest mutual funds, exchange traded funds, and other investment vehicles popular with investors. If you want to invest in commodities through a managed fund, make sure you consult the Morningstar website. Yahoo! Finance Yahoo! Finance includes many different sources of information all conveniently located in one site. You have market analysis updated on an hourly basis, regular news alerts, and one of the best chart services on the web. If you’re considering investing in companies that produce commodities, Yahoo! Finance is your one-stop-shop to get information on the stock’s technical performance as well as its fundamental outlook. Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is the federal regulatory body responsible for monitoring activities in the commodities markets. Before you do anything related to commodities, make sure you look at the website. Before you invest, you need to know your rights as an investor and the CFTC is the best source of that information. Also make sure to check out their very comprehensive glossary. The Energy Information Administration The Energy Information Administration (EIA) is part of the U.S. Department of Energy and is the official source of energy statistics for the U.S. government and your number one source for information on energy markets. They cover everything from crude oil production and consumption to gasoline inventories and natural gas transportation activity. If you want to invest in energy, make sure you check out their Country Analysis Briefs, which give an overview of the global energy supply chain country by country. Stocks and Commodities Magazine If your desire is to become a serious commodity futures trader, then Stocks and Commodities magazine is a must read. Its articles include market-tested trading strategies to help you place and execute trades. Oil & Gas Journal The Oil & Gas Journal is a subscription-based magazine that features in-depth articles about the energy industry. If you want to trade the energy markets, make sure to read O&G. National Futures Association The National Futures Association (NFA) is the industry’s self-regulatory organization. If you are interested in investing in the futures markets, check out the website before you start trading. Specifically, make sure to check out the database of registered investment advisors if you’re going to go through a manager. NFA has comprehensive information on all managers through its Background Affiliation Status Information Center (BASIC) service.

Article / Updated 07-14-2022

Some investors think that “futures and options” and “commodities” are basically the same, but they’re not. Commodities are a class of assets that includes energy, metals, agricultural products, and similar items. Futures and options are investment vehicles through which you can invest in commodities. Think of it this way: If commodities were a place, futures and options would be the vehicle you’d use to get there. In addition to commodities, futures and options allow you to invest in a variety of other asset classes, such as stocks, indexes, currencies, bonds, and even interest rates, often referred to as financial futures. In Wall Street lingo, futures and options are known as derivatives because they derive their value from an underlying financial instrument such as a stock, bond, or commodity. However, futures and options are different financial instruments with singular structures and uses. Futures and options conjure up a lot of apprehension and puzzlement among investors. Most investors have never used them, and the ones who have often come back with stories about losing their life savings trading them. Their negative aspects are slightly exaggerated, but trading futures and options isn’t for everyone. By their very nature, futures and options are complex financial instruments. It’s not like investing in a mutual fund, where you mail your check and wait for quarterly statements and dividends. If you invest in futures and options contracts, you need to monitor your positions daily — or even hourly. You have to keep track of the expiration date, the premium paid, the strike price, margin requirements, and other shifting variables. That said, understanding futures and options can be beneficial to you as an investor because they’re powerful tools. They give you leverage and risk-management opportunities that your average financial instruments don’t offer. If you can harness the power of these instruments, you can dramatically increase your leverage — and performance — in the markets. The futures markets are only one way for you to get involved in commodities. Because they’re fairly volatile, it’s important that you have a solid understanding before you jump in. Although several books deal specifically with futures and options, check out Options Trading For Dummies, 4th Edition. For a comprehensive list of money managers who specialize in helping investors invest in the futures markets, check out Commodities Investors LLC.

Cheat Sheet / Updated 05-03-2022

The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.

Article / Updated 12-03-2021

Gas prices increase every summer, and oil companies report record profits just as Americans are preparing for the summer travel season. The two events — rising fuel prices and increasing travel by Americans — may seem more than coincidental. Fact is, gas prices are based on a combination of monetary and fiscal details: the price of crude oil, taxes, refining costs, and distribution costs. Source – Energy Information Administration (March 2011) The Energy Information Administration describes these pricing components as follows: Taxes: the monthly national average of federal and state taxes applied to gasoline. Distribution & Marketing Costs: the difference between the average retail price of gasoline and the sum of the other 3 components. These are the costs charged by a local retail gasoline station and include profits. Refining Costs: the difference between the monthly average of the price of gasoline and the average price of crude oil purchased by refiners. This also includes profits. Crude Oil: the monthly average price of crude oil purchased by refiners. Crude oil price is the single biggest factor in the price of gasoline. United States refineries produce approximately 90 percent of the gasoline used in the United States, with about 45 percent of U.S.-produced gasoline coming from refineries along the U.S. Gulf Coast. Less than 40 percent of the crude oil used by U.S. refineries is produced in the United States. Why gas prices rise Gas prices rise (or fall) primarily due to changes in the global crude oil market. Prices are also affected by variations in tax rates among states, in addition to refinery issues, and retail gasoline dealer issues like location, rent, and local competition. Global market for crude oil The price of crude oil is the main contributor to the general increase in retail gasoline prices since the start of 2009. Generally, a $10 increase in oil prices translates to a 25-cent increase in retail gasoline prices. Crude oil prices depend on several factors including worldwide supply and demand, stability of the distribution network, the value of the U.S. dollar, and price speculation. Supply of crude oil: The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil-rich countries, which produces about 43 percent of the world’s crude oil, exerts significant influence on prices by setting production limits on its members. When the overall supply of crude oil decreases, the world market tightens and price usually rises. Restricting the supply pushes up pump prices by as much as 80 cents a gallon. OPEC countries have essentially all of the world’s spare oil production capacity and possess about two-thirds of the world’s estimated crude oil reserves. Worldwide demand for crude oil: The United States consumes more oil and refined products (such as, gasoline, diesel, heating oil, and jet fuel) than any other nation in the world. The demand for crude oil in China, India and other developing countries, however, has risen with their populations, increased trade, growing internal markets, and strong commodity prices. Developing nations are expected to account for nearly half of the global demand by 2015, up from 36 percent in 1996. Increasing demand leads to higher prices. Interruption of the distribution network: Interruptions in the flow of crude oil through the distribution network can cause gasoline prices to rise, including natural disasters like Hurricane Katrina, the Gulf Coast-BP oil spill, or political instability in countries like Iraq, Libya, Yemen, Saudi Arabia, Venezuela, or Nigeria. Value of the U.S. dollar: Oil is traded on the world market in U.S. dollars. When the value of the dollar drops compared to other major currencies, producers earn less and compensate by raising the price per barrel of oil. Commodities market speculation: Speculation in the commodities markets where crude oil is traded also drives up the cost. Financial speculators make money on the fluctuations in prices of commodities like oil by placing bets that the price will go up or down. Some studies have shown that the speculative interest in crude oil markets has doubled, from 18 percent to 36 percent from 2003 to 2009. Speculative activity creates a cost premium estimated at about a fifth of the oil price or 20 cents of every dollar spent on gasoline. The U.S. Commodity Futures Trading Commission and the U.S. Department of Justice regulate and investigate speculation and illegal market manipulation in the crude oil market. Tax impact on price at the gas pump Federal, state, and local government taxes are the second largest part of retail gasoline prices. Federal excise taxes are approximately 18 cents per gallon, and state excise taxes averaged 22 cents per gallon at the beginning of 2011. As of January 2011, 12 states levy additional state sales and other taxes on gasoline. Oil refining requirements and costs Refiners typically earn about 20 cents for every gallon they process. Refiners lose money when plunging prices require them to sell gasoline for less than the crude oil they bought. Refining costs and profits vary due to the different gasoline formulations required in different parts of the United States. To comply with the Clean Air Act, refiners must switch to summer blend formulas for many urban markets on or around May 1 each year. Such blends are more complex and more expensive to make. Many contain ethanol, an alcohol mixed with gasoline to create a cleaner fuel that can account for up to 15 percent of some gasoline blends. How your local gas station profits from gas sales Retail dealers earn approximately 14 cents on every gallon of gasoline sold. Dealer costs include wages and salaries, benefits, equipment, lease/rent, insurance, and other overhead. An individual dealer’s cost of doing business varies depending on location and number of local competitors. Stations next to each other may have different traffic patterns, rents, and sources of supply that affect their prices. Gasoline often costs more in wealthy neighborhoods, because stations pass along higher real estate costs. Credit card companies also earn 2.5 percent of the transaction cost as opposed to a flat fee, which impacts dealer margins.

Article / Updated 04-21-2020

Because banks provide the necessary liquidity and credit availability for the global economy to function, the disruption in the banking system disrupted commodities markets, capital markets, and the real economy. What started as several delinquent accounts in a subsection of the real estate market ended up disrupting the world economy — and, with it, prices for everything from crude oil and aluminum to corn and soybeans. As the darkest days of the crisis began to subside, the U.S. government (followed by governments around the globe) took unprecedented steps to try to stabilize the financial system. These actions included nationalizing the banks, a step so foreign in America and so incompatible with American values that many were abhorred by the government’s intervention in the private sector. Source: Federal Reserve Bank Other governments also took steps to contain the crisis around the world. Iceland opted for nationalization by having the government own the banks, and Ireland, Spain, Greece, and Germany guaranteed deposits. Russia chose extra government funding, whereas Australia cut interest rates. You need to be familiar with the events of the 2008 global financial crisis (GFC) because they’ve had a major impact on the economy in general and commodities in particular. If you’re interested in researching the root causes of the crisis, and for more information on the GFC and its aftermath, check out the following books: The Big Short: Inside the Doomsday Machine, by Michael Lewis (W. W. Norton & Company) Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves, by Andrew Ross Sorkin (Viking Adult) The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, by Gregory Zuckerman (Crown Business) Sometimes even the greatest risk-management techniques can’t replace common sense. Many industry practitioners claim that 2008 was an unforeseeable event, one that occurs only every generation or century. However, many industry insiders who followed the markets closely applied common sense and saw that the real estate sector was in a bubble. Investors shrewd enough saw that this housing bubble was going to have a ripple effect across asset classes because many assets were now interlinked through complex derivative instruments. Those astute investors were able to appropriately manage this risk and position their portfolios to actually benefit from this event. John Paulson, the hedge fund manager of Paulson & Co., was able to manage the housing bubble risk and handsomely benefit from the downturn, returning more than 570 percent in 2008 while most other financial institutions were hemorrhaging billions of dollars in losses. Therefore, with the right judgment, analysis, and approach (and, yes, a little bit of luck), the astute and wise investor can still successfully navigate even this large-scale risk.

Article / Updated 04-03-2017

Corn, like other commodities such as crude oil and coffee, comes in different qualities. The most important types of corn you should be familiar with are high-grade number 2 and number 3 yellow corn, which are both traded in the futures markets. The most direct way of investing in corn is by going through the futures markets. A corn contract exists, courtesy of the Chicago Mercantile Exchange (CME), helps farmers, consumers, and investors manage and profit from the underlying market opportunities. Here are the contract specs: Contract Ticker Symbol: C Electronic Ticker: ZC Contract Size: 5000 Bushels Underlying Commodity: High grade No. 2 or No. 3 Yellow Corn Price Fluctuation: $0.0025/bushel ($12.50 per contract) Trading Hours: 9:05 a.m. to 1:00 p.m. Open Outcry, 6:30 p.m. to 6:00 a.m. Electronic (CST) It’s important to know the trading hours for corn and other commodities that trade both on the open outcry and through electronic trading. Open outcry hours are a legacy from the pre-Internet age, when people traded all contracts on the trading floor; you can still participate in this trading method during the hours noted. The electronic trading system is the latest addition and is much quicker, so you can be sure to get your orders placed quickly and efficiently. The open outcry system is slowly being phased out; eventually, electronic trading will permanently replace it. Trading Months: March, May, July, September, December Corn futures contracts are usually measured in bushels (such as the corn contract offered by the CBOT). Large scale corn production and consumption is generally measured in metric tons. Historically, the United States has dominated the corn markets, and still does due to abundant land and helpful governmental subsidies. China is also a major player and exhibits a lot of potential for being a market leader in the coming years. Other notable producers include Brazil, Mexico, Argentina, and France. Country Corn Production (Millions of Tons) United States 307 China 165 Brazil 51 Mexico 25 India 18.5 South Africa 12.7 Argentina 12.6 Ukraine 11.4 Canada 10.5 Source: U.S. Department of Agriculture Like other agricultural commodities, corn is subject to seasonal and cyclical factors that have a direct, and often powerful, effect on prices. Prices for corn can go through roller coaster rides, with wild swings in short periods of time. Price of corn futures on the CBOT from 2003-2010. For more information on the corn markets, check out the following sources: Corn Refiners Association National Corn Growers Association Department of Agriculture Corn Research Service

Article / Updated 01-25-2017

Crude oil by itself isn’t very useful; it derives its value as a commodity from its products. Only after it’s processed and refined into consumable products such as gasoline, propane, and jet fuel does it become so valuable. Crude oil was formed over millions of years from the remains of dead animals and other organisms whose bodies decayed in the earth. Because of a number of geological factors such as sedimentation, these remains were eventually transformed into crude oil deposits. Therefore, crude oil is literally a fossil fuel — a fuel derived from fossils. Not all crudes are created equal. If you invest in crude oil, you need to realize right off the bat that crude oil comes in different qualities with different characteristics. You’d be surprised by how different that “black stuff” can be from region to region. Generally, crude oil is classified into two broad categories: light and sweet, and heavy and sour. Other classifications are used, but these are the two major ones. The two criteria most widely used to determine the quality of crude oil are density and sulfur content. Density usually refers to how much a crude oil yields in terms of products, such as heating oil and jet fuel. For instance, a crude oil with lower density, known as a light crude, tends to yield higher levels of products. On the other hand, a crude oil with high density, commonly referred to as a heavy crude, has lower product yields. Sulfur content is another key determinant of crude oil quality. Sulfur is a corrosive material that decreases the purity of a crude oil. Therefore, a crude oil with high sulfur content, which is known as sour, is much less desirable than a crude oil with low sulfur content, known as sweet crude. How is this criteria important to you as an investor? First, if you want to invest in the oil industry, you need to know what kind of oil you’re going to get for your money. If you’re going to invest in an oil company, you need to be able to determine which type of crude it’s processing. You can find this information in the company’s annual or quarterly reports. A company involved in producing light, sweet crude will generate more revenue from this premium crude than one involved in processing heavy, sour crude. This distinction doesn’t mean that you shouldn’t invest in companies with exposure to heavy, sour crude; you just have to factor the type into your investment strategy. Crude Oil Type Density (API) Sulfur Content North West Shelf (Australia) 60.0 0.01 Arab Super Light (Saudi Arabia) 50.0 0.06 Bonny Light (Nigeria) 35.4 0.14 Duri (Indonesia) 21.5 0.14 As you can see, you can choose from a wide variety of crude oil products as investments. If you’re interested in investing in a specific country, you need to find out what kind of crude oil it produces. Ideally, you want a crude oil with low sulfur content and a high API number as a density benchmark.

Article / Updated 01-25-2017

Perhaps even more significant than population growth for the growth in commodity markets is the fact that it’s accompanied by the largest urbanization movement the world has ever seen. In the early 20th century, according to the United Nations (UN), less than 15 percent of the world’s population lived in cities; by 2005, that number jumped to 50 percent — and shows no sign of decreasing. As a matter of fact, 60 percent of the world’s population is expected to live in urban areas by the year 2030. The number of large metropolitan areas with 5 million or more people (mega cities) is skyrocketing and will continue to climb for much of the century. The number of cities expected to have 5 million inhabitants by 2015. When you compare that with the growth in the number of cities with 5 million people from 1950 to 2000, you quickly realize how staggering this growth really is. Urbanization is highly significant for commodities because people who live in urban centers consume a lot more natural resources than those who live in rural areas. In addition, more natural resources are required to expand the size of cities as more people move to them (rural to urban migration) and have more kids (indigenous urban population growth). More natural resources are required for the roads, cars, and personal appliances that are staples of city life. Industrial metals such as copper, steel, and aluminum are going to be in high demand to construct apartment buildings, schools, hospitals, cars, and so on. So investing in industrial metals is one possible way to play the urbanization card. As you can see, the largest urbanization is taking place in the developing world, particularly in Asia. As more Asians move from the countryside to large urban areas, expect to see huge demand from that part of the world for raw materials to fuel this growth.

Article / Updated 01-25-2017

Residential use of natural gas accounts for almost a quarter of total consumption of the commodity. A large portion of homes in the United States, as well as other countries, use natural gas for both their cooking and heating needs — the two largest applications of natural gas in the home. About 70 percent of households in the United States have natural gas ovens in the kitchen. The use of natural gas for cooking purposes has steadily increased as technological developments have allowed for an efficient and safe use of natural gas. How does this affect you as an investor? As long as folks need to cook, you can bet that natural gas will be there to fill this important need. This essential usage ensures that demand from the residential sector for natural gas will remain strong — a bullish sign for natural gas. More than 50 percent of homes in the United States use natural gas for heating purposes. One way to benefit from this particular application is to identify peak periods of natural gas consumption. Specifically, demand for natural gas for heating increases in the Northern Hemisphere during the winter seasons. Therefore, one way to profit in the natural gas markets is to calibrate your strategy to this cyclical, weather-related trend. In other words, all things constant, natural gas prices should go up during the winters as folks seek to stay warm. Natural gas is one of the cheapest energy forms, as measured by dollars per unit of energy generated. You get more energy from natural gas per dollar (as measured in British thermal units, the standard energy measurement unit) than from almost any other source. Using natural gas may save you some money during the winters — which you can then use to bulk up your commodities investments! Credit: Source: U.S. Department of Energy