A stock can theoretically be held forever. A commodity has to be dug up, grown, shipped, stored and eventually used — and that physical reality is exactly what makes commodity markets behave so differently from everything else.
4.1The commodity families
Three broad groups, each with its own logic:
- Energy — crude oil and its grades, refined products (gasoline, diesel), natural gas (Henry Hub, TTF, JKM), coal, carbon and power. Driven by growth, geopolitics and weather. (Part 5.)
- Metals — precious (gold, silver, platinum, palladium), driven by real rates and the dollar; and base/industrial (copper, aluminium, nickel, zinc, lead, tin), driven by global growth and especially China. (Part 6.)
- Agriculture — grains & oilseeds (corn, wheat, soybeans), the vegetable-oil complex (palm, soy oil), softs (coffee, sugar, cocoa, cotton, orange juice) and livestock. Driven by weather and harvest cycles. (Part 7.)
4.2Storage, cost of carry & convenience yield
Part 1.4 introduced the forward curve. Commodities give it teeth, because the cost of physically carrying the asset is large and the benefit of having it on hand is real.
The fair forward price is spot plus the cost of holding the commodity to delivery (financing + storage + insurance) minus the convenience yield — the hard-to-see benefit of actually possessing the physical commodity when you might need it (a refiner values having crude in the tank; a chocolate maker values cocoa in the warehouse). When supply is tight, that convenience yield spikes, the curve flips into backwardation, and the front month trades above later months.
Spot copper S = $9,000/tonne, 1-yr financing r = 5%, storage s = 1%. Two cases:
Tight supply (y = 9%): F = 9,000 × (1+0.05+0.01−0.09) = 9,000 × 0.97 = $8,730 → backwardation
Same spot, same rates — but the scarcity premium (convenience yield) alone flips the curve from contango to backwardation. The curve's shape is a supply-tightness barometer, and reading it is half of commodity trading.
4.3The players & the COT report
Commodity futures exist primarily so producers and consumers can hedge, and speculators provide the liquidity that lets them. Knowing who's on each side is a genuine edge.
- Producers / commercials (a shale driller, a farmer, a miner) sell futures to lock in a price for output they'll deliver later — structurally short.
- Consumers / end-users (an airline, a food manufacturer) buy futures to lock input costs — structurally long.
- Speculators (funds, CTAs, individuals) take the other side for profit, providing liquidity.
In the US, the Commitments of Traders (COT) report, published weekly by the CFTC, breaks down open interest by category. When speculators are crowded to one extreme — say, record net-long crude — it flags a positioning risk: there's little fresh buying left and lots of fuel for a sharp reversal if sentiment turns. The COT is a positioning gauge, not a timing tool, but extremes matter.
4.4Five ways to get commodity exposure
| Route | What it is | Watch out for |
|---|---|---|
| Futures | Direct, leveraged, the purest exposure; the price you read is the futures price. | Leverage, daily margin, and you must roll (curve cost). |
| Options on futures | Defined-risk directional or volatility plays. | Theta, vega, and the underlying's own roll. |
| ETFs / ETNs | Buy commodity exposure in a brokerage account (e.g. USO, UNG, GLD). | Roll drag in contango (Part 1.4); some are ETNs with issuer credit risk. |
| Producer equities | Shares in miners, drillers, farmers — operating leverage to the commodity. | Company risk (debt, management, hedging) on top of the commodity; not a pure play. |
| Physical / swaps / CFDs | Own the metal, or trade OTC swaps/CFDs for the price difference. | Storage & spreads (physical); counterparty risk (OTC); CFDs banned in some places. |
A gold miner with all-in costs of $1,500/oz earns $500 margin at $2,000 gold and $1,000 margin at $2,500 — so a 25% gold move can double profits: built-in operating leverage. But you also inherit the company's debt, jurisdiction risk, hedge book and management decisions. Miners can fall while gold rises. Use equities when you want amplified, story-driven exposure; use futures or physical when you want the commodity itself, clean.
4.5How is a commodity market's size actually measured?
"How big is this market?" has three different answers, and people conflate them constantly.
Crude oil illustration: world output ≈ 100 million barrels/day at $80:
One
CL contract = 1,000 bbl × $80 = $80,000 notionalIf front-month open interest ≈ 300,000 lots → open notional ≈ 300,000 × $80,000 = ≈ $24 billion in just one contract month
The physical figure tells you the economic importance; the open interest figure tells you how much hedging/speculative capital is committed; the daily volume figure tells you how easily you can get in and out. A market can be huge physically yet thin to trade (some softs), or modest physically yet extremely liquid (precious metals). Always ask which "size" someone means.
Energy is by far the largest commodity complex (crude alone ~$2–3tn/yr of physical value), precious metals are smaller physically but ultra-liquid, and most individual softs (orange juice, cocoa) are tiny by comparison — which is precisely why they can move violently on a single weather event. We give specific figures market-by-market in Parts 5–7. All sizes approximate; verify with the exchange / IEA / USDA at time of use.