Trading Concepts

Trading Commodities

Find out how to trade on a wide range of global commodities with FOREX.com.

What are commodities?

Commodities are natural products that are generally consumed by people, animals, or industry, such as oil, sugar, and wheat. Commodities have been traded for thousands of years and have always had an important economic impact on people and nations throughout history.

Commodity trading is just as important today, with these products playing a crucial role in global economics. Commodity markets can be easier to understand than other financial markets because prices are influenced by more obvious contributing factors. They reflect the fortunes of industries like the oil business or farming. Prices are informed by supply and demand issues that are easy to grasp.

Most commodities traded today can be split into three main areas:

Energy

Energy commodities are extracted out of the ground. They have a particularly strong influence over the global economy and are in turn influenced by demand from the global economy. Examples include:

  • US Oil
  • UK Oil
  • US Natural Gas

Agriculture

Agricultural soft commodities are generally those products that are grown or bred for human consumption, as opposed to commodities that are mined. Soft commodities are important in futures markets where people speculate on price fluctuations as supply and demand changes. They are also used by the farmers who produce these commodities to lock in the future price of their produce, and by commercial consumers and resellers of these goods. Examples of soft commodities include:
  • Coffee
  • Corn
  • Cotton
  • Soybean
  • Wheat

Metals

Hard commodities are resources that are generally extracted through mining, specifically metals. Metals that are traded can either be precious metals such as gold, silver or platinum, or industrial metals such as copper. Examples of hard commodities include:

  • Copper
  • Gold
  • Palladium
  • Platinum
  • Silver

How are commodities traded?

Commodity trading often takes place on exchanges as futures and options. Exchanges usually become hubs for a few commodities that they specialize in, for example:
  • Chicago Board of Trade (CBOT)
    Commodities that trade on CBOT include gold, corn, silver, wheat, and rice
  • Chicago Mercantile Exchange (CME)
    Commodities that trade on the CME include milk, cattle, pork bellies, and lean hogs
  • NYMEX 
    Known for being the most liquid marketplace for the trading of US Oil futures

What drives commodity markets?

Commodity markets exist to provide more efficient prices and security for consumers of those commodities. Airlines, for example, want to be able to protect themselves from sudden and unpredictable changes in oil prices, while farmers will be looking for the best price for their products. A food manufacturer will want to ensure that the price they pay for wheat will be steadily consistent.

Increasing interest in commodity trading represents the growth in interest in global trade and delivering an internationally-recognised price for a product.

Commodity markets can be influenced by a range of factors, including:

  • Interruptions of supply, such as bad harvests, union strikes, or stockpiling
  • Seasonal demand, for example from consumers of heating oil and natural gas in the winter, or people buying gold during periods of political uncertainty
  • General economic slowdowns or downturns, which can impact demand. Oil, for example, is especially sensitive to this
  • It is worth doing more research on a market you are interested in, as each has its own characteristics

Did you know?

There are two oil commodity markets, Brent Crude and West Texas Intermediate. These reflect the prices of US and non-US oil. To make things simpler, at FOREX.com we call them US Oil and UK Oil. While the prices of both will be similar, they are not the same.

Trading commodities with FOREX.com

  • FOREX.com offers CFD trading on commodities (spot and futures)
  • You can trade a dozen different energy, agricultural and metal commodities