Commodity Trading Guide

Richard Montana | October 21, 2022

What are Commodities?

Commodities are naturally occurring materials or goods that are collected and processed for use in human activity – such as oil, sugar and precious metals. They form the basis of our economy, because the raw materials are needed for the production of food, energy and clothing. Commodities are often mass-produced and standardised for quality and quantity, which means they’re priced the same regardless of who produced them.

Commodities are different from other types of goods in that they are standardized and interchangeable with goods of the same type. Commodities can be divided into several categories: agricultural, energy, metals, and environmental.

The individual commodities can be combined to produce other goods or services. An example of this is when the commodities sugar and cocoa are used to create chocolate bars. Then you have commodities that are used for their own purpose such as natural gas to heat your home.

Examples of commodities include steel, oil, and rice. Steel is a metal commodity used in a wide variety of industries including in the construction of highways and buildings. A typical energy commodity is crude oil, which is primarily used to create RBOB gasoline but also has applications far outside energy production. Rice is used in many ways like the manufacture of breakfast cereals. Like most agricultural commodities, rice is also consumed directly.

Commodities are bought and sold on exchanges, like stocks. Well-known exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME).

One of the key differences between commodities and other goods is that they are interchangeable and standardised. This means that the value of each commodity is set by the commodity exchange. Thus, it does not matter where the commodity is produced or who produces it, they will have a similar quality and price globally.

What is Commodities Trading?

Generally, commodities are extracted, grown, produced, and traded in large enough quantities to support liquid and efficient markets. These markets provide a transparent way for commodity producers, consumers, traders and speculators to transact business.

Commodities are extremely important as they are essential factors in the production of other goods. Most of us will use a range of commodities each day, perhaps without even realising it. From the milk in your morning coffee, your glass of orange juice, the oil and gas that fuel your car and home, to the cocoa in your chocolate. These are all amongst the commodities that can be invested and traded on the commodities market.

When you trade commodities, you can speculate on the price of raw physical assets, such as gold, silver, oil, gas, wheat and sugar. Commodity brokers allow you to buy and sell commodities without needing to actually take ownership of the underlying asset or worry about physical delivery.

There are a number of ways you can trade commodities: investing in the physical commodity itself, trading commodity futures, trading commodity options, trading commodity ETFs, trading commodity shares and trading CFDs on commodities. CFD traders will buy (go long) if they think prices will rise, or sell (go short) if they think prices will go down. The difference between the prices when a commodities trade is opened and closed is the realised profit or loss.

Commodity prices are sensitive to moves in the value of the US dollar and can be influenced by a range of factors like:

  • Fluctuations in supply and demand
  • Poor harvests
  • Natural disasters
  • Wars and conflict
  • Miner’s strikes
  • Trade tariff and regulations
  • Big economic events

One of the primary commodity groups are Metals, which are sometimes referred to as “hard” Commodities as these physical assets are generally mined out of the ground and include precious and semi-precious metals such as gold and silver.

Energy markets make up the second biggest group of Commodities and these assets include products such as oil, natural gas and crude oil.

The energy markets are heavily traded as they have a particularly large influence on the global economy, think of how many supplementary industries and companies rely on petrol to drive business; everything from transport to farming and industrial development.

History of Commodities Trading

Commodities trading is one of the oldest markets that dates all the way back to ancient civilisation. It is believed to have originated in Sumer (now southern Iraq) between 4500 BC and 4000 BC. Traditionally, people would exchange tokens or tickets in exchange for animals, rice or other commodities. Trading commodities has a much longer history than that of stock trading and forex trading.

The global commodities market really started to accelerate when the Chicago Board of Trade was setup in 1848. They would act as a counter-party to both the buyer and seller in the transaction, which eliminated the risk of default.

For around the next hundred years, agricultural products were the primary commodities traded on futures exchanges. Then, in the mid-1900s, cotton, lard, livestock and precious metals were gradually introduced to the exchanges.

It wasn’t until the 1970s that new financial products began to be developed – products that allowed people to speculate on the changing prices of commodities, without having to purchase or sell the physical commodity.

The commodities market is now amongst one of the most popular types of markets to trade on, from commercials, institutions and speculators alike. Historically, commodities were traded physically, whereas today, most commodity trading takes place online.

What Impacts Commodity Prices?

There are a range of different factors that affect the price of a commodity, with each commodity having its own unique characteristics. Price fluctuations can occur depending on the availability of a commodity along with supply and demand, currency strength and even the weather.

The fundamental rule is that commodity prices will rise with increasing demand. Prices will also rise when there is a fall in the overall supply or inventory of a commodity. On the other hand, the price of a commodity will fall when faced with decreasing demand and increasing supply.

Commodity supply

The supply of a commodity is the amount of the commodity which the sellers or producers are able and willing to offer for sale at a particular price, during a certain period of time. The availability of a commodity can be determined by a variety of factors, including government intervention, transport, cost to produce, weather, war, and more.

As an example, in 2019, the world’s largest oil processing plants in Saudi Arabia were attacked which reduced the global oil production by 5 million barrels per day. This caused a record surge in the price of oil due to there being less oil available but the demand remaining the same. Therefore, commercials and institutions tried to get their hands-on whatever oil they could. This is a rare type of ‘scarcity’ that can typically lead to an increase in commodity prices.

Commodity demand

The demand for a commodity is its quantity which consumers are able and willing to buy at various prices during a given period of time. The demand of a commodity can be influenced by a range of factors, including a change in consumer habits and the health of the economy.

This is evident in the price of sugar decreasing over the years as people have become more health conscious and sugar consumption levels have changed. This caused less demand for the commodity which had an impact on its price.

US Dollar and commodities

The behaviour of the US dollar is another key factor that can influence the price of commodities along with supply and demand.

On international markets, commodities are priced in US dollars (USD) whilst it is also the world reserve currency. This entails that commodity prices can be linked to the value of the USD against other foreign currencies. As an example, if the value of the dollar was much lower than other currencies, it would cost more dollars to purchase the commodities than it would if the dollar is valued at a higher rate.

When there are times of economic turmoil and the value of USD decreases, some investors may turn to gold as a safe haven asset. Therefore, gold can benefit from being priced higher in USD and also from the further investment which can create larger price fluctuations than some other commodities.

Commodity substitution

Commodity substitution is where market participants will try to find cheaper alternative commodity elsewhere. This can happen if a particular commodity becomes too expensive and there are cheaper options which can act as a suitable replacement. In this instance, the demand for the original commodity may reduce which can results in the occurrence of a price decrease.

Copper is a prime example of commodity substitution. Copper is used in a variety of different industrial applications. Some manufacturers began using aluminium to replace copper as it increased in price.

The weather impact on commodity prices

Another factor that can have an influence on the price of commodities is the weather. Agricultural commodities such as coffee, cocoa and wheat, require consistent weather cycles in order to be grown and harvested. Unexpected weather conditions such as torrential rain or drought can have a great impact on these commodities.

The weather can also have an influence on energy commodity prices. If there is an extremely could winter, there is likely to be an increased demand for heating which increases the demand for heating oil and natural gas. If there is a very hot summer, there is likely to be an increased demand for air conditioning which would increase the demand for commodities involved in electricity production, such as natural gas and coal.

Why Trade Commodities?

For investors, commodities can be an important way to diversify their portfolio beyond traditional securities. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility. Three of the primary reasons for trading commodities are the growing global population, inflation hedging and portfolio diversification.

Growing population

The global population has increased at a rapid rate since the beginning of the twentieth century. The more people in the world, the greater the demand for commodities. This means that commodity prices are likely to continue to increase over the long term.

As the population continues to grow, so does the demand for infrastructure, which could have a significant impact on the demand for both metal and energy commodities. In addition, a larger population means that there are more mouths to feed, which can affect the demand for agricultural commodities.

Inflation hedging

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. In terms of commodities, this means that it will cost more US dollars to purchase the same amount of a given commodity in the future.

Some traders would consider investing in commodities directly in order to try and protect themselves against these prices increases which they could benefit from by selling the commodities at a higher price at a later date.

Portfolio diversification

The majority of investors tend to stick to a particular asset class. This is understandable to an extent as it can take significant time and knowledge to understand each market. However, if the market they are invested in starts to take a bad turn, the whole portfolio is hit. Had they diversified their investment portfolio across multiple assets, the overall portfolio may not have been as adversely affected.

How to Trade and Invest in Commodities?

There are various ways to trade commodities: investing in the physical commodity itself, trading commodity futures, trading commodity options, trading commodity ETFs, trading commodity shares and trading CFDs on commodities. We will outline each of these options below.

Investing in physical commodities

Investing in physical commodities is when you go directly to the source and purchase the goods themselves. If you then own the physical commodities for a period of time and the prices rise, you could benefit from the difference.

However, it is not very feasible for the average retail trader to physically purchase and sell large quantities of commodities. You will also need to consider transporting and securely storing the products along with finding a suitable buyer.

Trade commodity futures

Commodities futures contracts are agreements to buy or sell a raw material at a specific date in the future at a particular price. The contract is for a set amount. In simple terms, if the commodity price rises between the purchase date of the contract and the expiration date of the contract, the trader can sell the futures contract at a profit. If the price falls, the trader will make a loss.

Commodity futures can be used to hedge or protect an investment position or to bet on the directional move of the underlying asset.

One of the benefits of trading commodity futures is the use of leverage, which allows traders to take a larger trade position than they would have been able to with their available funds.

For example, if a futures contract is offered with leverage of 1:5, this means that for each dollar the trader wants to invest, they can access $5 worth of the commodity in question. It should be noted that whilst leverage can increase potential profits, it can also significantly increase potential losses.

Commodity options

In a similar manner to commodity futures, commodity options are a type of financial derivative that allowed traders to speculate on the value of a commodity without having to purchase the commodity outright. Options can also be traded with leverage.

There are two types of commodity options, a call option and a put option. The owner of a call option has the right but not the obligation to buy a commodity futures contract at a set price (the strike price) on or before a certain date (the expiration date). The owner of a put option, on the other hand, has the right but not the obligation to sell a futures contract at the strike price on or before the expiration date.

There are two sides to every option trade, a buyer and a seller. Each of these sides experiences the opposite outcome; if the option buyer is making money the option seller is losing money in the identical increment, and vice versa. If the price of the future becomes higher than the strike price, a call option can be sold for a profit. For a put option, the reverse is true – the price of the future needs to fall below the strike price.

Commodity ETFs

An ETF, or an exchange-traded fund, is a fund that invests in a group of financial assets. As a trader, you can invest in these funds via a trading broker or on a stock exchange.

ETFs are commonly known for containing a combination of stocks, although some ETFs do invest in physical commodities such as gold bullion, whilst others invest in commodity futures or options.

A commodity ETF is an exchange-traded fund (ETF) invested in physical commodities, such as agricultural goods, natural resources, and precious metals. A commodity ETF is usually focused on either a single commodity—holding it in physical storage—or investments in futures contracts.

This means that the risks involved with trading commodity ETFs can mirror the risks of the assets contained within the ETFs. Thus, ETFs that invest in physical commodities will carry similar risks to investing in physical commodities, whilst those ETFs that invest in futures carry similar risks to buying futures directly.

Traders may choose to invest in commodity ETFs due to the diversity that comes with investing in a range of assets via a fund, rather than picking individual assets to invest in. Although this does mean that the risk is spread amongst the asset within the fund and thus, there is the possibility to miss out on some large movements that may take place on individual commodities.

Commodity shares

Commodity shares is a term used to refer to investing in shares of a company that produces the commodities. The idea behind it is that the revenue of the company is determined by the price of the commodity which they are selling. If the price of the commodity was to increase, we could anticipate that the company’s revenues and its share price should also increase.

It must be noted that there are other factors which influence a commodity share price such as market competition, business costs, interest rates, local economy and more.

Commodity CFDs

In finance, a contract for difference (CFD) is a contract between two parties, typically described as “buyer” and “seller”, stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time.

At the end of the contract, the two parties exchange the difference between the price of the commodity at the time they entered into the contract, and the price of the commodity at the end. In simple terms, the trader is paying the difference between the opening and closing price of the commodity they are trading.

CFDs enable you to speculate on rising or falling prices without taking ownership of the underlying asset, and can be used to trade a range of markets including shares, forex, indices and commodities.

As an example, if you had opened a long (buy) CFD trade on gold when the price was $1,530, and you chose to close the trade after the price of gold increased to $1,555, you would have made a profit on the difference in the gold price, or $25. If the price fell to $1,505, then you would have made a loss of $25.

Commodity CFD trading is popular due to the simplicity of opening and closing positions, especially when compared to some other forms of investing. Benefits include leverage, 24-hour markets, competitive fees, no need to hold physical commodities along with the ability to trade long and short.

In order to trade commodity CFDs, you will need to open a trading broker account with a broker so that you can buy and sell commodity CFDs online through the trading platforms that they provide.

What are the Different Commodity Markets?

In simple terms, commodities are usually either extracted, grown or produced. The commodities market can be categorised into four main categories which are as follows:

  • Agricultural Commodities: This includes raw goods such as sugar, cotton, coffee beans, corn, soybeans, dairy products, wheat and more.
  • Energy Commodities: This includes petrol products like crude oil and natural gas along with coal and electricity.
  • Metal Commodities: This includes precious metals such as gold, silver and platinum, but also base metals like copper, lead, nickel and zinc.
  • Livestock Commodities: This includes pork bellies, live cattle and general livestock, as well as meat commodities.

In the commodities market, you will often see these referred to as hard commodities and soft commodities. Hard commodities are those that are primarily mined (gold, oil, etc.) whilst soft commodities are agricultural or animals (wheat, soybeans, pork, sugar, etc.).

As we would expect, some commodities are more popular and traded more frequently than others. For example, the feeder cattle market may only be of interest to the farmer and company distributing the stock. However, a market like oil will usually involve drilling companies, large service companies like BP and Shell, airlines who are actively involved in buying and selling oil to keep their fuel costs in check and market speculators.

We will now take a look at some of the most commonly traded commodities.

Agricultural commodities

Coffee: Coffee is one of the most popular beverages around the globe with billions of cups consumed every single day. It is also a popular choice in the commodity market, making it one the most traded commodities after crude oil.

Sugar: White sugar and raw sugar can be traded as commodities. Most people see sugar as an additional sweetener although it should be noted that it is also a key player in the production of ethanol. Ethanol is an important industrial chemical; it is used as a solvent, in the synthesis of other organic chemicals, and as an additive to automotive gasoline (forming a mixture known as a gasohol). Ethanol is also the intoxicating ingredient of many alcoholic beverages such as beer, wine, and distilled spirits.

Energy commodities

Crude Oil: Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Crude oil is a type of fossil fuel that can be refined to produce usable products such as gasoline, diesel, and various other forms of petrochemicals. Demand for this commodity is also high, because crude oil is used for transportation fuel, the production of plastics, synthetic textiles, fertilisers, computers, cosmetics and more. The major oil benchmarks are WTI and Brent Crude Oil. It can be a popular commodity for trading because of its volatility and it is a market that is very reactive to political events, with the top producers of crude oil including Saudi Arabia, the US, Russia and China.

Natural Gas: Natural gas (also called fossil gas; sometimes just gas), is a naturally occurring hydrocarbon gas mixture consisting primarily of methane, but commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium. This commodity has a range of industrial, residential and commercial uses, including generating electricity. Some of the top natural gas producers are Gazprom, Royal Dutch Shell, ExxonMobil, PetroChina and BP.

Metal commodities

Gold: Gold is perhaps the most popular commodity when it comes to metals. Known as a precious metal and often seen as a safe haven asset, gold is typically a commodity that some investors look to when other markets are in turmoil. It is not uncommon to historically see gold inversely correlated with the US dollar. Gold has a higher value than silver and is often seen as a long-term investment.

Silver: Although gold is widely regarded as the most popular metal commodity for trading, there are some advantages to trading silver. This includes it’s fast moving price which can be an attractive proposition for the active commodity traders.

Copper: Copper is always in demand as it is used for a variety of products and services such as electrical equipment, engineering, plumbing and cooking utensils. Some say that the price of copper is considered to be a barometer of the global economy as a whole, thus investing in copper can be a way to take a bullish stance on world gross domestic product (GDP).

Natural Gas Trading

When talking about natural gas, we’re usually talking about a type of fossil fuel. These fossil fuels are made from the remains of plants and animals that were buried deep under the earth and were converted into natural energy resources thanks to millions of years of heat and pressure.

Unlike oil, which can be found in vast reservoirs beneath the earth’s surface, natural gas is often locked in rocks and sediment. To get it out, extraction companies will usually use a process known as hydraulic fracturing, or fracking, in which water, chemicals and sand are forced deep into the earth to drive the natural gas out.

There are other forms of non-fossil-fuel natural gases out there, such as biomethane which is a pipeline-quality gas that is biochemically made from organic materials from landfills, livestock, wastewater, and other sources. What we traditionally consider to be natural gas is not renewable, but there are some alternative forms of natural gas such as biomethane, that are renewable.

The most common form of natural gas on earth is methane. Methane and other natural gases such as ethane, propane, butane, and pentane are usually taken from both natural gas and crude oil wells. Each of these gases is chemically different from one another but they can all be used to create energy in certain circumstances.

Natural gas is mainly for industrial use and electric power. These two sectors consume roughly 69% of all the United States’ natural gas. 16% is used to power residential homes, while the rest is used for commercial ventures and transportation.

History of natural gas

Naturally occurring natural gas was discovered and identified in America way back in 1626, when French explorers discovered indigenous peoples igniting gases that were seeping into and around Lake Erie. In 1821, William Hart dug the first successful natural gas well in the U.S. in Fredonia, New York.

The first commercial natural gas transpired in Britain. Around 1785, the British used natural gas produced from coal to light houses and streets. In 1816, Baltimore, Maryland used this type of manufactured natural gas to become the first city in the United States to light its streets with gas.

In 1836, the City of Philadelphia created the first municipally owned natural gas distribution company. Today, the public gas systems in the United States of America number more than 900, with the Philadelphia Gas Works being the largest and longest operating public gas system in the USA.

Throughout the 19th century, natural gas was primarily used a source of light. However, in 1885, Robert Bunsen’s invented what is commonly known as the Bunsen burner. This invention opened plenty of more opportunities in which ways to use natural gas. After the building of the most effective pipelines in the 20th century, natural gas use was expanding to heating the home and cooking, appliances such as water heaters and oven ranges, manufacturing and processing plants, boilers to generate electricity and more.

Natural gas today

Natural gas is today a vital component of the world’s energy supply. It is estimated that natural gas currently supplies over one-half of the energy consumed by residential and commercial customers, with approximately 41% of the energy being used by the industry in the USA. Interestingly, around 99% of the natural gas that is consumed in the United States derives from North America. The popularity of natural gas has been maintained by its increased use in developing countries like China and Indonesia for the last decade or so.

Natural gas is considered to be one of the safest, cleanest, and most useful of all energy sources. Burning natural gas for energy results in fewer emissions of nearly all types of air pollutants and carbon dioxide (CO2) than burning coal or petroleum products to produce an equal amount of energy. Because natural gas is generally a clean burning fossil fuel, it has had a role to play in attempts to attain national goals of a cleaner environment, energy security and an economy that is more competitive.

What is natural gas trading?

Natural gas is one of the most commonly-traded commodities out there. Being highly volatile, it presents traders with an ample amount of opportunities. Natural gas trading is the buying and selling of the commodity with the goal of turning a profit.

How does natural gas trading work?

Henry Hub Natural Gas (NG) futures are the industry benchmark and they are traded through the Chicago Mercantile Exchange Group (CME Group). The name comes from the Henry Hub, which is a natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX). The hub is owned by Sabine Pipe Line LLC and has access to many of the major gas markets in the United States.

Some of the key natural gas market players at the moment include:

  • Exxon Mobil: ExxonMobil is one of the world’s largest publicly traded international oil and gas companies.
  • Chesapeake Energy: Chesapeake Energy Corporation is a company engaged in hydrocarbon exploration. It is headquartered in Oklahoma City, with an industry-leading portfolio of unconventional, onshore oil and natural gas assets in the U.S.
  • Occidental Petroleum: Occidental Petroleum Corp. engages in the exploration and production of oil and natural gas in the United States, the Middle East, Colombia, Canada and Chile.
  • Devon Energy: Devon Energy Corporation, an independent energy company, primarily engages in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States.
  • BP: BP plc (formerly The British Petroleum Company plc and BP Amoco plc) is a British multinational oil and gas company headquartered in London, United Kingdom with operations in Europe, North and South America, Australasia, Asia and Africa. The Company provides customers with fuel for transport, energy for heat and light, power for industry, and the petrochemicals products used to make everyday items such as paints, clothes and packaging.
  • Encana: Encana is one of the largest independent gas companies in the world, with operations mostly in the western United States and Canada, where it is based. The company has focused almost exclusively on gas.
  • ConocoPhillips: ConocoPhillips is a multinational corporation engaged in exploring, developing and producing crude oil and natural gas globally. It is based in the Energy Corridor district of Houston, Texas.
  • Southwestern Energy Company: Southwestern Energy Company is an independent energy company. The Company primarily focused on natural gas and crude oil exploration, development and production (E&P).
  • Chevron: Chevron Corporation is an American multinational energy corporation. One of the successor companies of Standard Oil, it is headquartered in San Ramon, California, and active in more than 180 countries. Chevron works to meet the world’s growing demand for energy by exploring for oil and natural gas; refining and marketing gasoline; producing chemicals and more.
  • Williams Energy: The Williams Companies, Inc., is an American energy company based in Tulsa, Oklahoma. Its core business is natural gas processing and transportation, with additional petroleum and electricity generation assets.
  • Gazprom: Gazprom is a global energy company focused on geological exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales of gas as a vehicle fuel, as well as generation and marketing of heat and electric power.
  • China National Petroleum: The China National Petroleum Corporation is a major national oil and gas corporation of China and one of the largest integrated energy groups in the world.
  • Total: Total is a broad energy company, which produces and markets fuels, natural gas and low-carbon electricity.
  • Royal Dutch Shell: The Royal Dutch Shell plc is a company based in the Netherlands that explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations.
  • Equinor: Equinor is an energy company with more than 21,000 employees developing oil, gas, wind and solar energy in more than 30 countries.
  • Eni: Eni is an Italian energy company operating primarily in petroleum, natural gas, and petrochemicals. Established in 1953, it is one of Europe’s largest oil companies in terms of sales. Eni has operations in more than 70 countries. Its headquarters are in Rome.

Types of natural gas

There are two basic types of natural gas. The characteristics that separate wet from dry are technically dependent on the “thermal maturity” of the rock formation.

Natural gas is known as being dry or wet, with dry gas being more thermally mature and consisting primarily of methane, whereas wet gas is less thermally mature and may contain “natural gas liquids” including ethane, butane, propane, and pentane. These natural gas liquids need to be separated from the methane to ensure the natural gas sent to consumers has a consistent BTU content. Wet gas is currently considered to be more valuable in the marketplace as the natural gas liquids have inherent value as a commodity.

What moves natural gas prices?

The price of natural gas mainly changes according to the supply and demand. There is a vast range of factors that can have an impact on the supply and demand of natural gas. Some of the key factors that impact the supply and demand of natural gas include:

When there is a high demand for natural gas that is greater than its supply, the price of natural gas will likely rise. On the contrary, if the demand of natural gas falls and supply increases in the market, the price of natural gas will likely fall. Increases in prices tend to encourage natural gas production and imports, and sales from natural gas storage inventories. Declining prices tend to have the opposite effects.

Because there are limited short-term alternatives to natural gas as a fuel for heating and electricity generation during periods of high demand, changes in supply or demand over a short period may result in large price changes. Prices themselves often act to balance supply and demand.

Factors on the supply-side that can have an impact on prices include natural gas production, net imports, and storage inventory levels. Factors on the demand-side include weather (temperatures), economic conditions, petroleum prices and the price of alternative forms of energy. Cold weather (low temperatures) increases demand for heating, while hot weather (high temperatures) increases demand for cooling, which increases natural gas demand by electric power plants.

Economic conditions can influence the demand for natural gas, especially by manufacturers. Demand may be moderated by petroleum fuel prices, which may be an economical substitute for natural gas for power generators, manufacturers, and large building owners.

Natural gas traders will often use economic news releases such as gross domestic product (GDP) and employment figures to anticipate the direction of natural gas prices.

Why trade natural gas?

Natural gas is one of the world economy’s main energy sources, making it a very popular commodity to trade. A naturally occurring fossil fuel, can be used as a source of energy for heating, cooking, and electricity generation. It is also used as a fuel for vehicles and as a chemical feedstock in the manufacture of plastics and other commercially important organic chemicals. It is highly demanded, traded in volume, and extremely liquid. Natural gas trading can therefore deliver competitive trading conditions along with clear chart patterns, and high volatility.

Traders may choose to trade natural gas as way to try and earn profit by speculating on natural gas prices. For instance, when trading natural gas CFDs you can speculate on prices without actually needing to physically own natural gas. This makes it a convenient trading method for anyone who has a trading account with an online broker. Companies may also trade natural gas to lock in natural gas prices and hedge against adverse price movements.

Oil Trading

Oil trading is the buying and selling of different types of oil and other oil-linked assets with the goal of turning a profit. As oil is a finite resource, meaning it is limited, oil prices can see large fluctuations when there are changes in the supply and demand. The volatility of oil therefore makes it a popular trading instruments among traders.

History of oil

Throughout human history, even before oil and gas, energy has been a key enabler of living standards. Wood was burned for warmth, cooking and used as a building material. The beginning of the 18th century brought about the invention of the first modern steam engine, which indicated the transformation from an agricultural society to an industrial economy.

Although steam engines could be powered by either wood or coal, it wasn’t long before coal became the fuel of choice and it soon enabled significant growth in the scale of industrialization. Coal produced four times as much energy as wood whilst it was also cheaper to produce and easier to distribute.

When the 20th century approached, environmental concerns and technological breakthroughs led another energy source shift from coal to oil, which emerged as the preferred energy source.

Amongst the key factors that influenced this transformation were the electric light bulb and cars. Car ownership and demand for electricity grew exponentially which in turn, increased the demand for oil.

Today, oil remains a main source of energy although burning oil releases carbon dioxide into the atmosphere, contributing to the warming of our planet. Petroleum accounts for a large percentage of the U.S.’s carbon dioxide emissions from fossil fuels. Scientists say the world cannot afford to burn more than one-third of known oil reserves in order to avoid the worst impacts of climate change.

That being said, companies are increasingly exploring alternative forms of creating energy such as solar, wind and hydroelectric. Governments are also continuously exploring new legislations to help limit the impact on the environment. Currently, oil remains a popular commodity on a global scale, which makes it easily accessible to trade online.

How does oil trading work?

You can trade popular oil markets – such as US and Brent crude – and oil-linked ETFs, online through various methods including spot markets, futures contracts, options contracts, spread bets and CFDs (contracts for differences).

Some of the key crude oil market players at the moment include:

  • Sinopec: This is the largest oil refiner in Asia.
  • ExxonMobil: The world’s leading refiner with a capacity of processing around 6 million barrels a day.
  • Royal Dutch Shell: Shell operates over 40,000 oil service stations globally.
  • BP: The company was the first to discover oil in the Middle East.
  • Total SA: This oil giant operates over 900 subsidiaries, which cover all areas of energy production.

Types of oil

There are over 160 different types of crude oil traded on the markets. West Texas Intermediate (WTI), Brent Crude, OPEC Reference Basket, Dubai Crude, Bonny Light and Urals are just six of many.

The two most popular types are Brent Crude and West Texas Intermediate (WTI), which are traded on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX) respectively. They are used as benchmarks for global oil prices, as well as economic health and tend to draw the most attention among traders, investors and market analysts.

West Texas International (WTI)

WTI is a top-quality crude oil that is commonly referred to as US Crude and is valued highly around the world. It’s a common belief that a greater quantity and quality of gasoline may be refined from one barrel of WTI than from any other type of oil traded on the market.

West Texas Intermediate is a light and sweet crude oil that is refined in the United States, which is amongst the largest gasoline-consuming countries in the world. WTI is usually priced a few dollars higher than Brent Crude oil and even higher than OPEC Basket oils.

Brent Crude

Brent Crude is another important oil, one that typically serves as a benchmark for oil prices all across the globe. Primarily extracted from the North Sea, it consists of Brent Blend, Forties Blend, Oserberg and Ekofisk crudes – known as the BFOE Quotation.

Brent crude is the most traded of all of the oil benchmarks, and is widely used as it is both sweet and light, making it easy to refine into diesel fuel and gasoline.

OPEC Basket

OPEC oil serves as a combination of seven different types of crude oil coming from Saudi Arabia, Nigeria, Algeria, Dubai, Venezuela, Indonesia and Mexican Isthmus. Founded in 1960, Organisation of Petroleum-Exporting Countries (OPEC) is one of the bigger players in the oil industry, managing oil production and sale within its jurisdiction.

OPEC oil is less sweet and much darker than WTI and Brent, which makes it slightly cheaper. Never the less, it still remains an extremely important player on the global oil market.

What moves oil prices?

The price of oil mainly changes according to the supply and demand. There is a vast range of factors that can have an impact on the supply and demand of oil. When there is a high demand for oil that is greater than its supply, the price of oil will likely rise. On the contrary, if the demand of oil falls and supply increases in the market, the price of oil will likely fall. Some of the key factors that impact the supply and demand of oil include:

  • The influence of OPEC: Countries within the Organisation of Petroleum Exporting Countries (OPEC) produce a large share of the oil supply worldwide. The group sets production levels in order to meet global demand, and thus can influence the price of oil when they decrease and increase the output.
  • Global economic performance: When there is economic growth, the demand for oil increases to meet the needs of various industries such as energy, manufacturing, transport, and pharmaceuticals. In this instance, if the demand outweighs supply, then oil prices can increase. However, if the economy is in a period of recession and there is a lack of growth, demand for oil may decrease, which can lead to lower oil prices if production continues.
  • Oil storage: If oil production continues when the demand for oil falls, there will be a surplus of oil that gets put into storage facilities. However, there are limits on the amount of oil that can be stored which can lead to tanks being filled up and have an impact on oil market prices.
  • Changing to alternative energy sources: With global warming being at the forefront of people minds, energy companies who rely on oil are increasingly looking to find new ways in which they can generate power. If there is a significant move towards an oil alternative such as solar, wind and hydroelectric, this could lower the demand for oil and impact oil prices.

Oil traders will often use economic news releases such as gross domestic product (GDP) and employment figures to anticipate the direction of oil prices.

Why trade oil?

Crude oil is the world economy’s primary energy source, making it a very popular commodity to trade. A naturally occurring fossil fuel, it can be refined into various products like gasoline (petrol), diesel, lubricants, wax and other petrochemicals. It is highly demanded, traded in volume, and extremely liquid. Oil trading can therefore deliver tight spreads, clear chart patterns, and high volatility.

Traders may choose to trade oil as way to try and earn profit by speculating on oil prices. For instance, when trading oil CFDs you can speculate on prices without actually needing to physically own barrels of oil. This makes it a convenient trading method for anyone who has a trading account with an online broker. Companies may also trade oil to lock in an oil price and hedge against adverse price movements.

Trading Gold

The most common gold CFD instrument to trade on is XAUUSD. This is gold priced against US dollars. With a trading broker, users can speculate on the price of gold (XAUUSD), as well as on other related markets such as XAUAUD which is gold priced against the Australian dollar.

History of gold

Gold trading goes all the way back to the Roman Empire when it was used as a form of money. Nowadays, traders can buy and sell gold online at the click of a button with just an internet connection and a laptop. The volume of gold that is being bought by central banks is considered to be at its highest level, making it a popular choice for online trading.

Gold is a commodity that is often seen as a source of wealth that can be inherited in its physical form. Whilst gold is used in commercial and industrial activities, such as in jewellery and mobile phones, it is also speculated on by traders, hedge funds and even central banks. When there are times of economic uncertainty, many see gold as a “safe haven” asset. This is primary due to the fact it can be used to conduct energy and also melted down to form currency.

Gold has been used as a medium of trade and a store of value for thousands of years, and trading gold in the 21st century is just as relevant as it’s always been. Gold remains a valuable store of value, with some investors using it as a hedge against financial crisis, inflation, and geopolitical risks.

The gold market is one of the largest and most liquid markets in the world, giving traders ample opportunities although it can be volatile at times.

What moves gold prices?

There are a variety of different factors which can have an influence on the price of gold, some of which can change over time. Amongst the major influences are the following:

  • Economic uncertainty: When there are periods of economic unrest, the price of gold can be impacted as some investors may buy into gold’s safe-haven status. One example of this is in 2019 when the gold prices trended higher than usual due to escalations in the US-China trade war.
  • Interest rates: If there is a rise in interest rates, gold may become less attractive to investors who will look to other asset classes which could benefit from rising interest rates, such as currencies or bonds.
  • Global economic data: As gold is considered by many to be a safe haven asset, if there are any significant changes in global economic data, this can have an impact on the demand for gold. An example of this would be if the global economy is slowing down and investors looked to exit other investments in favour of gold.
  • The US dollar. As gold is denominated in US dollars, currency movements in the US dollar can have an impact on gold prices. Thus, there is a possibility that a falling US dollar may push gold prices higher whereas an increasing US dollar could push gold prices lower.

All of these influences are a form of fundamental analysis which can be used to help try and anticipate future price movements. Some traders would combine fundamental analysis with other market analysis such as technical analysis, price action analysis and sentiment analysis to form a more complete trading strategy. It really depends on your individual goals and preferred trading style.

Why trade gold?

Gold is the most actively traded of all metals, and for good reason. It has unique properties of durability, malleability and conductivity that make it a desirable and in-demand metal for everything from industrial applications to jewellery. Just like most other commodities, the price of gold is shaped by market forces of supply and demand. Couple the high demand for gold with a limited supply, and you have all the ingredients for a sought-after commodity that can keep its value over long periods of time.

Traders will usually trade gold as way to try and earn profit from the variation in gold prices. When trading gold CFDs you can speculate on prices without actually needing to physically own the gold. This makes it a convenient trading method for anyone who has a trading account with an online broker.

Gold is also traded as a way to diversify a trading portfolio and hedge against other investments such as stocks and bonds. Investors may choose to buy gold as a safe haven asset for a long-term hold.

Trading Silver

The most common silver CFD instrument to trade on is XAGUSD. This is silver priced against US dollars. With a trading broker, users can speculate on the price of silver (XAGUSD), as well as on other related markets such as XAGAUD which is silver priced against the Australian dollar.

History of silver

Throughout history, silver has been synonymous with currency and has been regarded as a form of money and store of value for more than 4,000 years. The reason a British pound is called a pound is because it used to be the equivalent to a pound of silver. The words for silver and money are exactly the same in an impressive 14 languages.

By its very classification as a “precious metal”, silver finds itself in a small group of valuable commodities that includes gold, platinum, and palladium. This beautiful white metal has always been in demand because of its unique characteristics and relative scarcity. While demand for silver has been constant, prices can fluctuate frequently.

What moves silver prices?

The price of silver is driven by speculation and supply and demand, like most commodities. The price of silver is notoriously volatile compared to that of gold because of the smaller market, lower market liquidity and demand fluctuations between industrial and store of value uses. Understanding the pricing trends for silver requires a careful study of a number of different factors including:

  • Supply & demand: Just like any other financial asset, the price of silver is dependent on supply and demand. Whilst silver is more abundant in supply than gold, it also has more uses in industry and beyond. For example, if there was a strike that interrupts mining at a major producer, silver prices may spike over the short term. Likewise, any announcement of a new use of silver, such as in solar panels, could generate more buying and create upward price movements.
  • Demand for other metals: Silver is most often extracted from the ore of other metals. For example, copper ore accounts for 26% of all silver mining. Thus, if there is a spike in demand for copper, it can lead to a silver surplus.
  • Industrial output: Silver has a wide range of uses within industry, including in the production of solar panels, batteries, LED lights, RFID chips, nuclear reactors, photographic film, semiconductors, touch screens, water purification, wood preservatives and many other industrial uses. So industrial output levels can have a major effect on silver prices.
  • Economic uncertainty: Silver is widely considered to have an inherent value. This basically means that it can hold its value when there are times of financial stress or political crises. An example of this was in 2008-2010, when the price of silver actually rose more than the gold price.
  • Gold price: Silver trading tends to follow gold trading to a certain extent. Whilst this is not always the case, there can be occasions when there is an obvious price correlation between the two precious metals.
  • Dollar price: Like all of the other precious metals, silver is dollar-denominated. This means that currency movements in the US dollar can have an impact on silver prices. That sometimes makes silver an attractive investment to long term investors when the price of the dollar is low, which can in turn drive up its price.

All of these influences are a form of fundamental analysis which can be used to help try and anticipate future price movements. Some traders would combine fundamental analysis with other market analysis such as technical analysis, price action analysis and sentiment analysis to form a more complete trading strategy. It really depends on your individual goals and preferred trading style.

Why trade silver?

Although perhaps not being considered as rare or as valuable as gold, there are still a few benefits that make trading silver markets an attractive proposition in its own right. This includes:

  • Costs: Silver generally has a lower cost of entry when compared to other precious metals. For example, an ounce of silver bullion can typically cost around 40-80 times less than an ounce of gold.
  • Volatility: Silver is relatively volatile for a precious metal, meaning it can offer ample buy and sell trading opportunities to active traders.
  • Safe haven: Many consider silver to be what is known as a ‘safe haven’ investment in times of economic uncertainty. This may be due to the fact it can be used to conduct energy and also melted down to form currency.
  • Long or short: When trading silver CFDs you can speculate on falling or rising silver pieces without actually needing to physically own the silver itself.
  • Leverage: Many brokers will offer silver trading with leverage which enables traders to control a larger position size. Although as previously mentioned, this can also significantly increase risks.

How to trade commodities online?

If you have taken the time to read through the above, you should hopefully have an understanding of commodities and how to trade commodities online. Here is a summary of the key steps:

1. Decide if commodities trading is for you

Trading commodities online requires investing time and money. It also carries an element of risk, especially when trading commodities with leverage. You will need to research and analyse various commodities, follow market news and manage your commodity trades. It is important to understand the risks and dedication that comes with trading commodities online.

2. Educate yourself

Before trading commodities, it is important to learn as much as possible about the commodity market. This way you can be prepared as any mistake could prove to be costly. There is a vast array of free educational materials provided by many trading brokers that can help you to improve your online trading skills and knowledge.

Most brokerages will also offer a free demo trading account so that you can practice trading commodities online with virtual funds in order to familiarise yourself with trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.

3. Choose a commodities broker

In order to trade commodities online, you will need a trading account and platform to execute your trade positions through to the commodities market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options, commodities available to trade online and customer support.

4. Research commodities

If you have made it this far then you may be ready to start trading commodities online! The next step is to research the different commodities to discover which markets you have an interest in. Perhaps there is a particular commodity that is already of interest to you and you would like to use your knowledge to trade it. You can choose from hard and soft commodities.

5. Have a commodities trading plan

Amongst the most important factors that can help determine commodities trading results can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their commodities trading.

6. Buy and sell commodities

Once you know what commodities you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a commodities trade, you will need to keep track of how it performs and manage it according to your commodities trading plan. Some traders will keep hold of commodities for the long-term, whereas others may buy and sell commodities on a daily basis. You should always invest and trade in a way that suits your own personal goals.

What is a Commodities Broker?

A commodity broker is a firm or an individual who executes orders to buy or sell commodity contracts on behalf of the clients and charges them a commission. A firm or individual who trades for their own account is called a trader. Commodity contracts include spot markets, futures contracts, options contracts, spread bets, CFDs (contracts for differences) and ETFs (exchange-traded funds). Commodities trading is a popular product for some traders for a variety of reasons. These include:

  • Speculate long or short on rising or falling commodity prices without needing physical purchase and store them
  • 24-hour trading
  • Way to diversify a trading portfolio
  • Trade commodities with leveraged positions

Commodities can serve as a safe haven in times of global economic uncertainty and market turbulence, because they can retain their physical value. Commodities’ intrinsic value is independent from currencies. They will often hold their value, even if a currency falls during a period of inflation.

Choosing a Commodity Broker

There are various factors worth considering if you are looking for a commodity broker to trade online with. In this section, we will cover what we consider to be some of the most important factors that you need to be aware of when choosing a suitable commodities broker for your own individual needs.

Regulation

If you are looking for a broker to trade commodities online with, then regulation should really be one of the first things that you look for. We believe regulation to be very important as it can give traders some protection in the case something was to go wrong. Regulated brokers must follow strict rules and procedures that are put in place to protect investors. Without regulation, there may be no help should the worst happen.

Commodities

There are currently around 50 major commodity markets worldwide that facilitate trade in approximately 100 primary commodities. Commodities are split into two types: hard and soft commodities. If you have a particular commodity in mind, you will need to ensure that the broker you are considering has that commodity available to trade. The more commodities there are, the more choice you will have moving forward.

Fees

Brokers will often charge a commission fee for processing your commodity trades through their platform. There may also be accounting fees and inactivity fees. It is important to be aware of all the broker fees and compare brokers to make sure they are providing good value. If you are looking to save as much as possible on your trading costs, you can take a look at our best discount brokers.

Platforms

To trade commodities online, you will need a commodities trading platform which the commodity broker will provide you with. There are various desktop, web and mobile trading apps available, some more user-friendly than others. Each platform will have a choose of trading tools, features and functionalities. If you are already familiar with a specific trading platform, you may wish to check that the broker provides it. Alternatively, you can opt for a popular and user-friendly commodities trading platform such as MetaTrader or cTrader. You will find that there are lots of MetaTrader brokers which gives convenient market access for manual and automated trading strategies. If you don’t have the time or skills to trade and want to copy trading signals, you should look for a social trading platform.

Leverage

In finance, leverage refers to the act of magnifying positions in the commodities markets through the use of borrowed capital. You have to qualify for a margin account, but when you do, you’re able to use leverage (margin) to get into commodity positions. Leveraged products, such as commodity CFDs, magnify your potential profit but also your potential loss.

For example, if you had an account balance of $2,000 and leverage of 1:5, you would be able to take a position size of $10,000 ($2,000 x 5 = $10,000).

Whilst this does mean that you can control a position size larger than you would have been able to without leverage, it also means the risk is significantly greater. It is imperative that you have a clear understanding of leverage and how it works before trading with leveraged positions.

Education

The best commodity brokers should have a generous selection of educational resources such as trading guides, tutorial videos, webinars, eBooks, quizzes and more. These can help you to learn more about trading commodities online and to help familiarise yourself with the brokers products and services. We are a big advocate of brokers who support informed trading. If you are new to trading and need as much guidance as possible, you might want to explore our best brokers for beginners.

Tools

The best trading platforms will have an array of built-in trading tools to assist with their daily trading activities and thorough market analysis. However, if you require any additional tools, it may be worth checking that they are provided by the broker. Tools can include economic calendars and earning reports to keep up to date with the latest commodity market news, which can be used as part of a fundamental analysis. Other trading tools may include trade calculators, trading signals, market alerts and more.

Signup

Each commodity broker will have its own minimum deposit policy so check that you can meet this requirement. You may also need to provide some personal information in order to pass the brokers KYC and AML procedures. The sign-up process can be quicker at some brokers, especially if all of it is conducted online. During the sign-up process it is very important to make sure that you read all of the brokers terms and conditions, only proceeding if you understand and agree with them.

Funding

Commodity brokers can have a variety of different account funding options in order for traders to make deposits and withdrawals to and from their trading account. You should make sure that the broker has a convenient funding options for you along with the time taken and fees involved. Common broker payment methods can include wire transfer, credit/debit card whereas some brokers will offer online payment methods such as Neteller, PayPal and Skrill.

Support

There are commodity brokers located throughout the globe. Some will offer email and telephone support whereas others will also offer live chat support. You want to be able to contact the broker at a time and via a method that suits you. Therefore, it can be important to check where the brokers’ offices are located, what times they are available and how they can be reached. You could test their response time and quality prior to opening an account.

Conclusion

Now that you have had a brief overview of what commodities are and what to look for when choosing a commodity broker, you may be considering opening an online trading account to trade commodities online. To do so, you will need to choose a broker, follow the account opening process and you will then be able to start trading commodities online through one of their commodity trading platforms.

However, it is important to understand the significant risks involved with commodities trading, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.

This can be a useful way to familiarise yourself with how to trade commodities and use trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most trading brokers provide unlimited demo accounts free of charge.

Take your time to research brokers and do your own due diligence, the above information is only for educational purposes and not advice. Please feel free to view our best commodity brokers if you need some further inspiration before you get started.

About the Author

Avatar photo

Richard Montana
Richard has many years of experience in broker research, testing, analysis and reviews. He knows what to look for through years of trading himself with different brokers and listening to the feedback of others.

Review Methodology

For all of our broker reviews, we research, validate, analyse and compare what we deem to be the most important factors to consider when choosing a broker. This includes pros, cons and an overall rating based on our findings. We aim to help you find the best broker according to your own needs. You can read more about our review process.


Relevant Articles