What is commodity trading? (2024)

There are a range of commodities you can trade, including agricultural commodities such as corn, soybean and wheat. However, it's the energy markets, in the form of oil and gas trading, and metal markets (like gold and silver) that tend to be more popular with commodity traders these days.

We offer prices on over 100 spot and forward commodity instruments on our Next Generation trading platform, including Crude Oil (Brent and West Texas), Gold, Silver, Copper, Natural Gas and Coffee (we offer coffee trading for bothArabica and Robusta). This includes both spot prices and prices for forward contracts. When deciding whether to buy commoditiesat spot price or using a forward contract, traders can use contango and backwardation to decipher whether the future value may provide greater returns.

The commodity markets are traded in a similar way to other types of financial markets, but there are some points to be aware of in order to avoid any shocks or surprises when dipping your toe into commodities trading. In this article, we focus on two of the more actively traded commodities: oil and gold. You can spread bet or trade CFDs on the most traded commodities within the market.

Read more about spread betting and CFD meanings here.

When trading commodities, it’s important to be aware of events that can have an impact on oil prices. Prices don't just depend on how much oil is being pumped out of the ground, for example. As it’s a global fuel source, when the world economy is expanding and factories are working flat out, it stands to reason that world consumption of a commodity such as oil will go up.

As economies slow and demand drops, the price of oil and other commodities also tends to follow suit. In early 2016, crude oil was trading below $30 a barrel.

Since oil prices are also impacted by world events such as politics and socioeconomic situations, including the Middle East crisis, it helps as an oil trader to keep on top of news so as not to get caught out by an unexpected shift in oil prices.

Other factors influencing oil prices include decisions by the Organisation of Petroleum Exporting Countries (OPEC) and other major oil producing nations, such as Iran, on how much oil is produced and supplied to the market.

Another enduringly popular commodity is gold, which has long been considered a store of wealth and has held a special allure for many of us – as the Californian gold rush back in the 1840s would undoubtedly attest. Nowadays it’s traded like any other financial instrument​ and is still an important commodity to many traders around the world.

Traditionally, in times of trouble and market volatility, gold is perceived as a 'safe haven' – somewhere for investors to store their money away from other riskier assets. Although the yellow metal can in theory be traded in many currencies, the typical market quote is to price gold in dollars, usually as 'dollars per troy ounce'. This relationship to the US dollar is an important one and is another factor that will have an influence on the price of gold. If the dollar becomes more attractive to investors and starts to rise, the price of gold will usually drop. In recent years, some people have seen the US dollar as a safe haven for their money and that has reduced the appeal of gold.

This is another aspect to weigh up when trading gold: the impact any moves in the dollar will have on the price of gold. For example, if the US central bank, the Federal Reserve or FOMC​, decided to cut interest rates, this would normally weaken the US dollar and lift the price of gold. As with oil, because gold is such a global commodity it pays to keep a watchful eye on the major economic announcements such as interest rates and unemployment figures, which are released on a regular basis.

Read our in-depth guide on how to trade gold​.

The energy markets are also popular among commodity traders. The advent of renewable energy has generated added interest for commodities such as national gas, heating oil and gasoline. As with the oil markets, world events and politics can have an impact on the energy markets, so it is wise to keep an eye on news and economic releases when trading energy.

Some sources of energy cannot be invested in directly as a commodity, such as uranium, which is used for nuclear power stations. Instead, traders must invest in uranium through uranium stocks and ETFs​.

A commodity spread strategy involves taking opposite positions within the same or similar markets. This is a slightly lower-risk strategy than using futures contracts, as spreads experience less market fluctuations than a futures contract that is set to expire within a matter of weeks or months. A trader may use commodity spread trading in the hope that the difference between the spread becomes more positive in the long-term, as the long side of the spread will rise in value in comparison with the short side.

Like other commodity trading strategies, commodity spread trading can be affected by seasonality and other external factors. Therefore, traders can take advantage of a bull spread when trading high in the peak season for a particular commodity. In the same way, the trader can use a bear spread​ when prices are falling at the lowest peak of the year.

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