Understand the commodity futures markets — energy, metals, and agriculture. Learn contract specs, fundamental drivers, seasonal patterns, and how to build a commodity trading watchlist.
Introduction to Commodity Markets
What Are Commodity Markets?
Commodity markets are where raw materials and primary agricultural products are traded. Unlike stocks (which represent ownership in a company) or forex (which represents relative currency values), commodities represent physical goods — barrels of oil, ounces of gold, bushels of wheat.
Commodity futures contracts are agreements to buy or sell a specific quantity of a commodity at a specific price on a specific future date. The vast majority of futures traders never take physical delivery — they close positions before expiration or roll to the next contract month.
Hard vs Soft Commodities
Hard Commodities
Hard commodities are natural resources that are mined or extracted:
Energy:
- Crude Oil (WTI — CL, Brent — BZ)
- Natural Gas (NG)
- Heating Oil (HO)
- Gasoline (RB)
Metals:
- Gold (GC)
- Silver (SI)
- Copper (HG)
- Platinum (PL)
- Palladium (PA)
Soft Commodities
Soft commodities are agricultural products that are grown or raised:
Grains:
- Corn (ZC)
- Wheat (ZW)
- Soybeans (ZS)
- Soybean Oil (ZL)
- Soybean Meal (ZM)
Softs:
- Coffee (KC)
- Sugar (SB)
- Cotton (CT)
- Cocoa (CC)
Livestock:
- Live Cattle (LE)
- Lean Hogs (HE)
- Feeder Cattle (GF)
What Drives Commodity Prices
Supply Factors
Production levels: How much of the commodity is being produced? Oil output from OPEC members, gold mining production, wheat harvests — all directly impact available supply.
Inventory levels: Stored supply acts as a buffer. When crude oil inventories build (more oil in storage), it signals oversupply and prices tend to fall. When inventories draw down, it signals strong demand relative to production and prices rise.
Supply disruptions: Wars, sanctions, pipeline explosions, mine collapses, droughts, and hurricanes can suddenly reduce supply. The 2022 Russia-Ukraine war disrupted wheat, natural gas, and oil supplies, causing price spikes across the commodity complex.
Technology and capacity: New drilling techniques (fracking revolutionized US oil production), new mines, and agricultural innovations change long-term supply dynamics.
Demand Factors
Economic growth: When the global economy grows, demand for energy (factories, transportation), metals (construction, manufacturing), and food (population) increases. GDP growth is the single best predictor of broad commodity demand.
Emerging market demand: China and India's industrialization has been the dominant demand driver for commodities over the past two decades. Chinese construction demand drives copper, iron ore, and steel. Indian population growth drives agricultural demand.
Substitution: When oil prices rise too high, consumers and industries switch to natural gas or renewables. When copper prices surge, aluminum can substitute in some applications. Substitution creates price ceilings.
Currency effects: Most commodities are priced in US dollars. When the dollar weakens, commodities become cheaper for non-US buyers, increasing demand and pushing prices higher. The inverse also holds — a strong dollar tends to pressure commodity prices.
Seasonality
Unlike stocks or forex, commodities have strong seasonal patterns rooted in physical reality:
- Crude oil demand rises in summer (driving season) and winter (heating)
- Natural gas demand surges in winter (heating) and summer (cooling/electricity)
- Grains are planted in spring, grown in summer, and harvested in fall — prices are most volatile during growing season when weather threatens yields
- Gold demand increases during Indian wedding season (October-December) and Chinese New Year
These seasonal patterns are not guarantees, but they create statistical tendencies that traders can incorporate into their analysis.
Commodity Futures Contract Basics
Contract Specifications
Every commodity futures contract has standardized terms:
| Specification | Crude Oil (CL) | Gold (GC) | Corn (ZC) |
|---|---|---|---|
| Exchange | NYMEX (CME) | COMEX (CME) | CBOT (CME) |
| Contract size | 1,000 barrels | 100 troy oz | 5,000 bushels |
| Tick size | $0.01/barrel | $0.10/oz | $0.25/bushel |
| Tick value | $10.00 | $10.00 | $12.50 |
| Trading hours | Sun-Fri, nearly 24h | Sun-Fri, nearly 24h | Sun-Fri, nearly 24h |
| Contract months | Every month | Feb, Apr, Jun, Aug, Oct, Dec | Mar, May, Jul, Sep, Dec |
Micro and E-mini Contracts
Full-sized commodity contracts can be expensive. A single crude oil contract controls $70,000+ worth of oil. For smaller traders, the CME offers:
- Micro WTI Crude Oil (MCL): 100 barrels (1/10 of CL). Tick value: $1.00.
- Micro Gold (MGC): 10 troy oz (1/10 of GC). Tick value: $1.00.
- Mini Corn (XC): 1,000 bushels (1/5 of ZC). Tick value: $1.25.
These micro contracts make commodity futures accessible to prop firm traders and retail accounts with smaller capital bases.
Contract Rollover
Commodity futures contracts expire. Unlike the ES (which rolls quarterly), some commodities roll monthly (crude oil) or at irregular intervals. As expiration approaches, volume migrates from the expiring "front month" to the next contract.
Rollover matters because: The next contract may trade at a different price than the expiring one (this is called contango when the next month is higher, or backwardation when it is lower). Rolling a position from one contract to the next incurs the spread between the two prices, which is a real cost.
Most commodity traders switch to the next contract 5-10 days before the current one expires, when volume in the new contract becomes dominant.
Key takeaways
- Commodities are divided into hard commodities (energy, metals) and soft commodities (agriculture, livestock)
- Supply and demand fundamentals drive long-term commodity prices, while speculation and sentiment drive short-term moves
- Seasonality is a powerful force in commodities — unlike stocks, physical commodities have harvest cycles, weather patterns, and consumption seasons
- Commodity futures contracts have expiration dates and physical delivery specifications that equity futures do not
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- 1Introduction to Commodity MarketsReading
- 2Energy Futures🔒
- 3Metals Futures🔒
- 4Agricultural Futures🔒
- 5Seasonal Patterns in Commodities🔒
- 6Fundamental Analysis for Commodities🔒
- 7Building a Commodity Trading Watchlist🔒