Commodities are raw materials that are used in production to have finished goods. It includes wheat, coffee beans, crude oil, natural gas, and many other things. These commodities hold an intrinsic value that increases and decreases.

These commodities are produced and traded among countries around the world, and some countries rely on commodities as the backbone of their economy. Economies that are based on agricultural and other types of raw materials are majorly engaged in trading commodities. 

Some currencies are highly associated with commodities, which means that a change in the price of commodities directly affects the value of these currencies in the market.

Petroleum commodities have a global demand. They are the most traded commodities in the world due to their role in industrial and economic development. Therefore, the prices of crude oil and Brent oil are highly speculated on and traded in the financial markets.

Additionally, some commodities construct the national reserve for a currency. Major currencies such as the US dollar and the British pound use gold as a national reserve, which means that any change in the value of these currencies directly affects the price of gold and vice versa. The price of gold directly affects the value of these currencies in the Forex market.

Commodity price fluctuations are associated with a wider range of events that take place around the world. The law of demand and supply contributes to the price of these commodities. For example, if one country decides to reduce its oil imports, it will change the demand for that commodity.

Similarly, if a country increases its production of a specific raw material, it will cause changes to the supply, thus affecting the price of the commodity.

International trade is one of the major factors in commodities. These commodities are traded between countries, under certain regulations such as trade agreements, quotes, or restrictions, and any change in these regulations causes changes in the price of commodities.

“The price of a commodity will never go to zero. When you invest in commodities futures, you're not buying a piece of paper that says you own an intangible piece of company that can go bankrupt.” - Jim Rogers

Commodity as a tradable asset

Commodities are major assets in the financial markets. There are around 30 commodities that are tradable in the commodities market. Some traders prefer commodities rather than other instruments because of the volatility and liquidity associated with them.

There are several factors that affect the price of commodities, which makes them highly speculated on by traders, creating price volatility. Commodity traders use moderately high volatility to gain from short-term trading.

Volatility in commodities differs between different types of commodities, the product cycle, as well as other factors like seasonality. There are common tradable commodities like natural gas, crude oil, minerals, and coffee beans, as well as less commonly traded commodities like cotton, cocoa, and sugar.

Today, most brokerage firms enable commodity trading. Also, there are different ways to trade commodities, either by trading futures contracts of these commodities, physically owning a commodity, or trading other stocks and funds that are based on commodities.

Top traded commodities

Depending on the type of commodity, a trader can embark on a short-term or a long-term investment. However, there are some top commodities that are most commonly traded due to their importance.

Crude oil

It does not come as a surprise that crude oil is the most traded commodity, as it is the most important source of energy around the world. Additionally, crude oil can be refined into different products, which makes it the most in-demand commodity worldwide.

Several countries control the production and global supply of crude oil. These countries meet regularly to set prices and policies. That makes crude oil more volatile than other commodities.

Crude oil holds political power as well, which can lead to conflicts and trade wars between countries, which can shift the entire price of oil.

Those who trade crude oil and WTI oil in financial markets need to keep track of a wide span of news, politics, economic events, and financial announcements to plan their next step.

The price of oil faces a lot of ups and downs. At the beginning of 2022, it witnessed some interesting price growth of around 25% during just Jan-Feb.

Coffee beans

Coffee beans are also one of the top commodities traded in financial markets, they are less politically influenced and are more of an agricultural product that can largely influence the economy of certain countries.

Coffee is an agricultural power for some countries, it is considered an important factor in the economic well-being of especially developing countries. There are different products and appliances that complement the production and consumption of coffee beans.

Trading coffee beans as a commodity does not require political intelligence as is the case with crude oil. However, the production of this commodity relies on weather conditions and seasons.

The price of coffee beans has been growing over the last few years. In 2021 alone, the price of coffee beans grew more than 90%.

Natural gas

Natural gas is considered one of the most traded commodities in the world. It is the main source of many products that we use every day, products such as heating gas, cooking gas, and electricity generation. 

That makes natural gas almost as important as crude oil. There are limited alternatives to natural gas, therefore, its price is highly affected by demand and supply. The demand for gas differs according to the season. Winter usually sees higher demand for natural gas.

The demand level for crude oil also affects the demand for natural gas. When more oil is being produced, these refineries require gas as a source of energy to run.

Additionally, there is a negative relationship between the demand for oil and gas, when the oil price rises, the demand for oil decreases, which leads to the demand for natural gas increasing.

You will need to find a financial broker to start trading commodities. The broker will give you the platform and access to the trading markets, where many traders are buying and selling oil, natural gas, wheat, and many other commodities.

Commodities can be traded in different ways - you can either physically own the product or trade on the future price expectations. Additionally, there are many stocks and funds that are constructed based on commodities. Some of these include:

Trading futures

The most common way to trade commodities is through futures contracts. A trader enters into a contract with another investor to agree on the future price of a commodity. This way, a trader can buy or sell a commodity on a specified date at an agreed price.

For example, a trader can agree on a future contract to buy 1,000 barrels of oil that cost $50 in 30 days. When the future contract term expires if the oil price became higher than $50 then you made a profit by buying oil at a cheaper price.

However, if the oil price after the contract expires became less than $50, it means that you lost money in the trade because you originally bought at a higher price.

Note that when the future contract ends, you do not transfer the goods physically. You take the other side of the trade. And in this case, you take the other side of the futures contract which means the right to sell 1,000 barrels of oil at the new market price.

Physical ownership

Some traders prefer to have the physical product in their hands. However, it does not work for every commodity. You cannot expect to receive 1,000 barrels of oil or loads of natural gas.

However, a trader can purchase the physical commodity of gold, silver, and platinum. Generally, a trader can enjoy physical ownership of precious metals because they can be transferred and stacked.

These commodities also do not need special requirements to store them, and they don’t have an expiration date. You may encounter an investor owning bars of gold and not herds of livestock.

Note that transaction costs are higher in precious metals than in other commodities, and if you want to hold a gold bar you need to bear the transfer or shipping fees.

Commodity-based stocks

You may also purchase stocks of companies that are commodity-based. This type of trading is used by those who are interested in commodities trading. For example, you may purchase shares of an oil refinery company, or gold mining company stocks.

The stock price of these corporations is highly affected by the price of the commodity they produce, and by the conditions of international trade between countries and the local economic situation.

Trading these stocks can be safer than trading the commodity directly. Unlike the commodity itself, there are several factors that affect the corporate stock price, factors such as management, sales, and shareholders’ demand.

Commodities ETFs and mutual funds

Similar to commodity-based stocks, there are index funds, mutual funds, or exchange-traded funds that include a basket of several commodities that you can trade.

These funds may include a basket of several types of commodities, for example, energy commodities and livestock commodities in one basket. Additionally, they can include commodity-based stocks.

This type of investment can be safer because there are different commodities with different volatility rates. Also, different commodities can stabilize the overall basket stock price.

For example, if a mutual fund includes two energy commodities like crude oil and natural gas, if the price of oil decreases, potentially the price of natural gas will increase.

Commodity trading markets

There are several markets for trading commodities, some of these markets specialize in a type of commodities like metals, energy, or agricultural commodities. They are less popular exchange markets than stock exchange markets.

In the United States, the major marketplaces are the Chicago Board of Trade, where precious metals and agricultural commodities are traded such as gold, silver, rice, and wheat. While the Chicago Mercantile Exchange trades livestock commodities such as milk, butter, and meat.

New York Mercantile Exchange is another important marketplace in the US, where traded commodities include precious metals and natural resources.

Other international commodities trading markets are Tokyo Commodity Exchange and London Metal Exchange, where different commodities are traded.

There are several factors that affect the price of a commodity. They can be internal factors regarding the national economy of a country and weather factors. While external factors include international trade between countries and import regulations of the trade partner.

The wide span of factors that influence the price of commodities makes some of them highly volatile. Some commodities have more buyers and sellers than others, which makes them more liquid and easier to trade. The major factors that affect the prices of commodities are as follows:

Geopolitics

Politics are one of the most important and major factors that affect commodities' prices, especially crude oil and natural gas. The Middle East is a crucial oil producer and exporter, and political instability causes disruptions in oil production which affects oil prices.

Additionally, oil prices are affected by the periodic meetings of OPEC, where major oil producers meet to agree on global oil policies, production volumes, and prices.

For example, Brexit affected the exports and imports between the UK and European countries, causing some taxes to be imposed on imported agricultural commodities. 

Therefore, these commodities became expensive for the UK, and if they decide to lower the imports, that means the demand for agricultural products will decrease and their prices will increase.

Macroeconomic

Economic indicators like inflation, economic growth, and unemployment can affect the price of commodities. Especially for a country that produces and exports the commodity.

For example, if Saudi Arabia, the main exporter of oil, experiences high levels of inflation, firms will reduce their investments because the profitability of that investment is uncertain. Eventually, companies might hire less or reduce their staff, which increases the unemployment rate.

An increased unemployment rate means less production volume and lower supply, and this change in the supply level directly affects oil prices. 

Such events do not directly affect the commodity price. Rather, they have a domino-effect-like, where one thing leads to the other, and finally, the commodity prices start changing.

Seasonality

Unlike other financial instruments, agricultural commodities are affected by weather conditions and seasonality, which can change the supply level of the commodity.

For example, coffee beans are harvested during autumn and winter. These months witness an increased supply of coffee beans, which leads to increased coffee bean prices around the world.

Therefore, a commodity trader needs to understand the agricultural product cycles and check for severe weather conditions that can damage the crops and decrease the supply level of a certain commodity.

Seasonality and weather conditions do not only directly affect the commodity itself but can affect transporting these commodities. During heavy snowfalls or when storms occur, transportation is more likely to pause, and this disruption in the supply chain affects the supply level of the commodity.

Global events

Black Swan events such as wars and diseases can severely damage the demand and supply of commodities. If a local dispute takes place in a country that is exporting a commodity, it can affect the supply and the price of that commodity, making it more expensive because of lower production levels.

Wars and politically-motivated disputes cause countries to deteriorate economically and change the supply and demand nature of goods. Countries become military-oriented at the expense of economic growth and unemployment levels.

For example, the Covid-19 pandemic that was announced in 2020 affected the global economy, people around the world were locked in their houses and could not go to work, which damaged the production and supply of most commodities around the world.

In the same example, demand for most commodities around the world was affected, because people favored saving money rather than spending on different products, including traded commodities. 

“If global oil prices or commodity prices are high, then it is bound to create inflation. So, we should not be too worried if the inflation is created by global commodity prices. When they come down, inflation will automatically come down.” -  Adi Godrej

Most commodities are denoted in the USD, therefore if you are trading any commodity pair, you need to open a buying or selling market position against the USD. However, different brokers can offer the opportunity to trade in different currencies like the Euro or the British pound.

However, some markets denote commodities in the currency of the producing country, like oil in the SAR, gold in AUD, and natural resources in CAD, but these are less popular marketplaces.

There are different strategies that you can use when trading commodities. The commodity trading strategy you choose will depend on the type of commodity, and whether you are trading futures, ETFs, or commodity stocks.

Day trading strategy

Day trading can be used with volatile commodities, day trading commodities implies entering the market, achieving some gains, and exiting the market, which can be repeated several times in one day until the end of the trading day.

Crude oil and natural gas have high volatility rates, their prices fluctuate way higher and far below the average market price, which makes them a good commodity to trade during the day.

Range trading strategy

Trading commodities using a range strategy implies utilizing the support and resistance indicators as well as Bollinger Bands. Using this strategy, a trader can enter the market and buy a commodity when the market price is at the support level or at the bottom of the range. 

Then, when the price trend reaches the top of the range on the resistance level, the trade may close the buy order, and open a selling market position.

This strategy relies on identifying the commodity overbuying and overselling areas. A trader may buy a market position when the commodity is oversold, or a trader may sell a market position when the product is overbought and the price is expected to change its direction.

Breakout trading strategy

This strategy relies on the fact that when a commodity’s price reaches a peak, whether high or low, it is going to achieve a new high or low price.

Therefore, commodity traders tend to enter the market when it has reached its peak, hoping that it is going to break out and record a new price, continuing its movement in the same direction.

This is a short-term trading strategy and breakouts do not usually last for very long. Trading commodity breakouts can be used in conjunction with the range strategy. This way you can see if the commodity price breaks outside the support and resistance levels.

• Commodities are raw materials and unfinished goods that can be traded in the financial markets. Commodities include oil, natural gas, cotton, wheat, coffee beans, etc.
• Some commodities contribute largely to national economies, which makes them more volatile and most commonly traded
• The prices of commodities are affected by national economic growth, inflation, and the unemployment rate. They are also affected by political and international agreements, the weather, and many other factors
• Commodities can be traded using futures contracts, physical purchase of a commodity, commodity stocks, and commodity ETFs