Commodities · M1 · 7 min
The commodity complex
Say what commodities are and who trades them, and turn an oil or gold futures price into a profit or loss.
In the news: “Brent rose $2” means $2,000 on every oil contract someone holds: here is how to work that out.
The essentials
- Commodity
- A raw material traded in bulk, where one unit of a grade is as good as another, so it trades on price alone. The four families are energy, metals, farm products and permits to emit carbon.
- Storage and transport
- Gold keeps in a vault for years, gas needs pipelines or tankers, power can barely be stored and wheat arrives once a year. These physical facts drive prices, which is why desks specialise in one commodity.
- Benchmarks
- Each market prices one grade at one place. is US crude delivered at , Oklahoma; is waterborne North Sea crude and prices most oil traded worldwide. Brent usually trades a few dollars above WTI.
- Contract size
- Each covers a fixed amount: 1,000 barrels for Brent or WTI, 100 ounces for COMEX gold. So $1 a barrel is $1,000 on one oil contract, and oil’s one-cent tick is worth $10.
- Producers and consumers
- A producer, such as an oil company, loses when prices fall, so it hedges by selling futures. A consumer, such as an airline, loses when prices rise, so it hedges by buying them.
Profit or loss on futures
P&L = N × Q × ΔP
- N
- number of contracts (negative if you sold)
- Q
- contract size: 1,000 barrels for Brent or WTI
- ΔP
- change in the price, per barrel
How it works
1. Raw materials, traded in bulk
The petrol in a car, the gas that heats a home, the wheat in bread and the copper in wiring all start as commodities: raw materials bought and sold in bulk. One barrel of a given crude oil is as good as another, so they trade on price alone. There are four families: energy, metals, farm products, and permits to emit carbon.
2. Each one is stored and moved differently
Gold can sit in a vault for years at little cost. Gas needs pipelines or special tankers. Electricity can barely be stored at all, and wheat arrives once a year at harvest. These physical facts drive each market’s prices, which is why trading desks specialise in one commodity.
3. A price for a commodity at a place
Oil in Oklahoma and oil in the North Sea are priced differently, mainly because moving oil costs money. So each market has a benchmark: one grade at one place. is US crude delivered at , Oklahoma. is North Sea crude loaded onto ships, and most oil traded around the world is priced from it.
4. A futures contract is a fixed amount
Most commodity trading uses a : an agreement, made on an exchange, to buy or sell a set amount at a set price on a later date. Each contract covers a fixed quantity, its . A Brent or WTI contract is 1,000 barrels, so one contract at $80 a barrel is worth 1,000 × $80 = $80,000.
5. Price moves become profit or loss
If Brent rises $1 a barrel, each contract is worth $1 × 1,000 = $1,000 more. A buyer gains that and a seller loses it. So P&L = contracts × contract size × price change. Buy 40 contracts and see Brent fall $1.75: 40 × 1,000 × −$1.75 = −$70,000.
6. Ticks: the smallest move
Prices move in minimum steps called ticks. Oil’s tick is one cent a barrel, worth 1,000 × $0.01 = $10 on one contract. Gold futures cover 100 ounces with a tick of 10 cents, so each tick is also $10. Tick value = tick size × contract size, and traders often count moves in ticks.
7. Who uses these markets
A producer, such as an oil company or a farmer, owns what it will sell, so a falling price hurts it. It protects itself, or hedges, by selling futures: if prices fall, the futures gain. A consumer, such as an airline, must buy later, so a rising price hurts it, and it hedges by buying futures.
Worked example
A fund buys 40 Brent futures at $82.15 a barrel. By the close Brent has fallen to $80.40. Each contract is 1,000 barrels.
- Barrels held: 40 contracts × 1,000 = 40,000 barrels.
- Value at the start: 40,000 × $82.15 = $3,286,000.
- Price change: $80.40 − $82.15 = −$1.75 a barrel.
- P&L: 40,000 × −$1.75 = −$70,000.
A loss of $70,000: on 40 Brent contracts, each $1 move is worth $40,000.
Check yourself
7 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Why are commodity desks so specialised?
Why are there two oil benchmarks, Brent and WTI, and why is there a gap between them?
Who are the natural buyers and sellers in the oil market?
Remember
Brent or WTI: $1 a barrel = $1,000 a contract
Contract value is price × size: learn the size, and every price move becomes a P&L you can say out loud.
Sources
- CME Group — Minimum price fluctuation: tick movements
- CME Group — Henry Hub Natural Gas futures contract specs
- CME Group — Gold futures and options fact card
- ICE — Brent Crude Futures
- London Metal Exchange — LME Copper contract specifications
- CME Group — Corn futures contract specifications
Definitions and maths are standard textbook material; dated facts link to the sources above. Worked numbers are illustrative.