Commodities
Raw materials as an asset class — energy, metals and agriculture, traded mostly through futures.
This marketWhat it is, what trades, and the ideas it runs on.
The market at a glance
Commodities are where finance touches the physical world: energy (crude, gas, power — the biggest complex), metals (precious and industrial) and agriculture, traded overwhelmingly through futures on CME, ICE and LME. Financial flows dwarf physical ones — WTI futures alone turn over the world's daily oil production many times before lunch — but physical reality disciplines every price: storage tanks fill, harvests fail, pipelines break.
The cast: producers (miners, farmers, drillers) selling forward to fix revenue; consumers (airlines, food companies, utilities) buying to fix costs; merchants (the trading houses — Vitol, Trafigura, Cargill) arbitraging space, time and quality; and financial players harvesting risk premia or hedging inflation.
The curve is the market
Spot prices make headlines; professionals trade the forward curve. Its shape encodes physical conditions: contango (later dearer — ample supply, storage paid) vs. backwardation (later cheaper — scarcity now, convenience yield high). Curve shape also determines the roll yield that dominates long-run futures returns — the silent force that made "long oil" ETF holders lose money in years oil went up.
Interactive: cost of carry & implied convenience yieldMedium
Compute the storage-arbitrage fair forward, and back out what the market's actual forward says about physical scarcity.
- Full-carry fair forward
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- Implied convenience yield
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- Annualised roll yield
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- Curve state
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F = S·e^{(r+u−y)T}. When the market forward sits below full carry, the gap is the convenience yield — the market's price for having the physical stuff now.
How the products fit together
Futures are the core — start there for curves, rolls and delivery mechanics. Options (mostly on futures, often Asian-style for corporate hedges) add boundaries instead of locks. Swaps fix prices for continuous flows — the airline's and utility's instrument. Precious metals are their own monetary species, priced like currencies. ETCs/ETPs wrap all of it for brokerage accounts — read that page before buying any commodity tracker; the roll math inside is where retail money quietly dies.
Concepts to master
- Spot, month, location, quality — "the oil price" is dozens of prices; professionals trade the spreads between them (calendars, cracks, bases).
- Convenience yield — the unobservable at the heart of pricing; backed out, never assumed.
- Margin is the killer — 2022's gas market showed hedgers going illiquid on winning positions; liquidity risk ≠ price risk.
- Commodities as an asset class — the inflation-hedge case rests on roll and collateral returns, not spot; judge any allocation through the total-return decomposition.
Interactive: fuel switching & the carbon priceHard
The short-run demand curve for carbon runs through power stations: at some EUA price, a gas plant undercuts a coal plant. Find that price.
- Gas: cost per MWh electric
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- Coal: cost per MWh electric
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- Dispatch order
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- Switching carbon price
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Emission intensities fixed at 0.202 (gas) and 0.341 (coal) tCO₂ per thermal MWh. Marginal cost = fuel/efficiency + carbon×intensity/efficiency — the clean spark vs. clean dark spread, stripped to essentials. See carbon allowances.
The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.
The units this market speaks in
- Every contract has a physical unit and it differs by market: barrels, troy ounces, bushels, tonnes, megawatt-hours. The price is per unit and the contract is a fixed number of them, so the tick value is arithmetic rather than a convention to memorise.
- The quote is always for a delivery month, never for "oil". A price without a month attached is not a price in this market.
- The trade is usually a spread between months, not a level. Contango and backwardation describe the shape, and the shape is where storage economics show up as a number.
- Basis is the difference between two places, not two dates — the same grade of crude is a different price at two terminals because moving it costs money.
- The roll has a calendar everybody knows, which is itself a market event: index positions move on a published schedule, and the price of that predictability is paid by whoever is rolling.
- Some units are not a substance at all. Degree days for weather, tonnes of CO2 for allowances, dollars per day for a vessel. Weather derivative, freight derivative.
Who is choosing, and who is forced
This is the market where the forced participants are the reason it exists. Producers and consumers are hedging a physical business; the financial participants are there because the hedgers need somebody to be.
- Forced: producers hedging output. A miner or a farmer sells forward to fix revenue against costs already committed. The decision is made by a board policy, not by a price view.
- Forced: consumers hedging input. An airline, a smelter, a utility. Same mechanism, opposite direction. Metallgesellschaft is what happens when the hedge is right and the cash flow timing is not.
- Forced on a published schedule: index rollers. Long-only commodity index products roll from one contract month to the next on dates everybody knows, in size, in the same direction.
- Forced by physics: anybody holding an expiring contract with nowhere to put the goods. There is no cash settlement to fall back on if the contract calls for delivery. April 2020.
- Choosing: speculators and dealers, who take the other side of the hedgers and are paid a risk premium for carrying what the physical world cannot.
What a bad day looks like here
- The shape of it: the financial contract meets the physical world and the physical world wins. Storage is full, the vessel is not there, the pipeline is shut.
- The first tell: the spread between the front two contract months moving violently while the price level does not. That is a storage signal, and it is the market's most honest one.
- The second tell: inventory at the delivery point, not inventory in general. A world with plenty of oil and no room at the delivery terminal is a world where the price can go below zero. April 2020.
- The squeeze version: a market small enough that one position cannot be exited without moving it, and a venue that has to decide what to do about that. Nickel, 2022.
- The question that would have caught it: if I still hold this at expiry, what am I contractually obliged to do with it?
How a trade actually happens here
Every other market on this site settles into a payment. This one can settle into a warehouse, and the contract is written around that possibility even for the participants who will never once use it.
- Agreeing it — a delivery month, not a date. A futures price is a price for a specified grade, at a specified place, in a specified month. Change any of the three and it is a different contract with a different price. Commodity future.
- Clearing it — daily, in cash. The exchange marks to its settlement price and moves money before the next session, so a producer hedging a harvest a year out funds that hedge every single day in between. Metallgesellschaft is the standing lesson in what the mismatch costs.
- The notice period is where most positions end. Before delivery opens, everybody not intending to deliver or receive closes out or rolls. Position limits tighten into that month for exactly this reason: the deliverable supply is finite and the paper position need not be.
- Delivery is a document, not a lorry. What changes hands is a warrant on metal in a named warehouse, a receipt for grain in a named elevator, or a nomination on a pipeline. The commodity itself may not move at all.
- A physical trade is its own contract. Quality specification, an independent inspection, a bill of lading, payment against documents — and a price that depends on whether the freight is the buyer's problem or the seller's.
- When it fails: the deliverable runs out while the paper does not. Nickel in 2022 and oil in April 2020 are the same failure seen from opposite ends — a short that could not deliver, and a long that could not take delivery.
Where the spread is, and who earns it
A commodity has costs that a financial asset does not: it takes up space, it degrades, it has to be insured, and it has to be somewhere. A paper position does not escape any of that — it pays for all of it, in the shape of the curve.
- The roll is the real cost of a long position. Holding exposure past an expiry means selling the near contract and buying the far one. When the far one is dearer, that trade loses money every single month regardless of what the price of the commodity does. Nobody charges it and it is the largest line in the account. Costs and fees.
- The curve is a storage bill. The gap between spot and a distant contract is financing plus storage plus insurance, less whatever benefit there is in holding the physical. That is why the shape of the curve is information rather than opinion — and why it inverts when the physical is genuinely scarce.
- The basis: your grade, your location, your month. A contract settles on a standard quality at a named delivery point. A producer's actual barrel or bushel is a different quality somewhere else, and the difference between the two is a cost that appears as a hedge that did not quite work. Metallgesellschaft is the textbook case.
- The exchange's fees and the broker's, plus the financing on margin that has to be posted daily whether or not the physical sale has happened.
- Freight, which is itself traded. Moving the commodity is a market with its own price and its own volatility, and hedging it is a separate transaction. Freight derivatives.
How a position here ends
This is the one class where doing nothing has a physical consequence. A forgotten position in a share is still a share; a forgotten position here is an obligation to receive several thousand barrels of something at a named terminal.
- You close it before the notice period. The ordinary ending, and the one every financial participant is organised around. The dates are published years in advance and are not negotiable.
- You roll it. Close the front month, open the next, pay the spread. Every month, for as long as the exposure is wanted.
- It goes to delivery. The contract becomes a physical obligation: a grade, a warehouse or terminal, a window of days, and a set of documents. This is why the specification is a long document rather than a line.
- It cash-settles against a published index. Several contracts never deliver anything — electricity, freight, and most gas indices — and settle against an average of assessed prices instead. The assessment method is then part of the product. Electricity futures.
- The price goes somewhere the contract did not anticipate. In April 2020 a crude contract settled below zero because storage had run out and the holders had nowhere to put the oil. Nothing was broken; the contract did exactly what it says. Negative oil.
- The exchange intervenes. Position limits, expanded margin, a halt — and in March 2022, on one metal, trades that had already happened were cancelled. An ending decided by a rulebook rather than by a market. The nickel squeeze.
Which risk decides across this class
Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?
Which of the five decides what, across these 10
Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.
- Market10 of 10The price of the thing moves.Decides: Carbon Allowances, Commodity ETC / ETP, Commodity Future, Commodity Option, Commodity Swap, Electricity Futures, Freight Derivative, Power Purchase Agreement, Precious Metals Spot, Weather Derivative.
- Credit1 of 10Somebody who owes you does not pay.Decides: Freight Derivative. Matters on 5 more.
- Liquidity0 of 10You cannot get out at anything near the marked price.Decides: none of them. Matters on 7 more.
- Funding1 of 10Cash is needed before the position pays off — margin, calls, rolls.Decides: Commodity Future. Matters on 5 more.
- Operational5 of 10The failure is in documents, systems, keys or people, not in prices.Decides: Carbon Allowances, Commodity ETC / ETP, Electricity Futures, Precious Metals Spot, Weather Derivative. Matters on 2 more.
Market decides 10 of the 10 — which is what makes this a class rather than a list: the instruments differ in shape and fail the same way. Credit decides exactly one of them, Freight Derivative, which is the reason to read that page rather than assume it behaves like its neighbours. Liquidity decides nothing here — which is not the same as being absent.
Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.
Go deeper
Deep diveCurve shapes: contango and backwardation
The futures curve slopes up when the market pays for storage, down when having the barrel today commands a premium. Same commodity, both regimes.
Point at a line to read what it is doing.
How do I read this chart?
Delivery month runs across from nearest to furthest, price up. Two shapes, and which one a market is in tells you about physical availability before it tells you anything about sentiment.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- Contango = storage + financing priced in. Backwardation = scarcity now, convenience yield high.
- Oil flipped regimes: deep contango 2015–17, backwardation through much of 2021–22.
- April 2020, WTI at −$37: storage full, expiring longs paying to escape delivery — contango's reductio ad absurdum.
- Curve shape is never trivia — it's the physical constraint of the moment, priced.
Deep diveRoll yield: why the futures investor lags the spot price
Funds can't hold spot barrels, so they roll futures — and in contango every roll buys dear and sells cheap. Over years, the gap compounds into the defining fact of commodity indexing.
Point at a line to read what it is doing.
How do I read this chart?
Years across, cumulative return up. Two lines that start together and separate without the spot price doing anything unusual. That separation is the single most misunderstood thing about holding commodities on paper.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- Contango drags, backwardation pays — the roll, not the price view, often decides the outcome.
- Cautionary tale: post-2009 natural-gas ETFs — gas roughly flat, funds down enormously, all roll cost.
- Check the curve before the thesis: right about the commodity, wrong about the curve, is still losing.
- The cost-of-carry calculator above extracts the implied roll from any spot/futures pair.
Deep diveSeasonality and inventories
Commodities are the only asset class with a weather forecast in the pricing model — but known seasonality is already in the curve. Only deviations pay.
Point at a line to read what it is doing.
How do I read this chart?
Months across, price up, averaged over many years. The shape repeats because the physical world does — read it as a tendency, not a forecast, and remember the average is an average of years that each looked different.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- January gas trades above July gas all year round — "buy before winter" earns nothing by itself.
- The tradable object: inventories versus seasonal normal — which is why EIA storage Thursdays move markets.
- Full storage buffers shocks (flat curves, contango); empty storage removes the buffer (spot decouples — Europe's 2021–22 gas winter).
- Professionals trade the spreads: March/April gas — the "widow-maker" — isolates the seasonal gap from the price level.
Deep diveMilestones: from grain pits to negative oil
The oldest derivatives market keeps writing new case studies:
- 1848 — the Chicago Board of Trade formalises grain forwards into futures.
- 1973/79 — oil shocks: energy becomes the macro commodity.
- 1980 — the Hunt brothers corner silver — and margin rules end the corner.
- 2005 — index financialisation (GSCI et al.): commodities become a portfolio "asset class", roll costs and all.
- 2008 — oil at $147 then $34 within months.
- 2020 — WTI settles at −$37: storage constraints price in public.
- 2021–22 — the European energy crisis: gas up 10×, power records, utility margin calls in the tens of billions.
- 2022 — LME nickel: a 250% squeeze, cancelled trades, a lawsuit era — and a lesson in exchange governance.
- 2005–now — the EU ETS matures from €5 oversupply to a €100, MSR-managed policy asset (see carbon allowances).
Interactive: 3-2-1 crack spreadMedium
A refinery's margin as a tradable number: three barrels of crude become (roughly) two of gasoline and one of diesel. The spread between input and output is the refiner's world.
- 3-2-1 crack spread
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- Gasoline per barrel
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- Diesel per barrel
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- Reading
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Crack = (2×gasoline + 1×diesel − 3×crude)/3, at 42 gallons per barrel. Refiners hedge it as a package; traders read it as the health gauge of product demand versus crude supply.
Deep diveWho runs this market
- Exchanges: CME Group (WTI crude, natural gas, grains, precious metals), ICE (Brent crude, European gas), the LME (base metals, with its unique warehouse and date structure), EEX and Nasdaq for European power.
- Price reporting agencies: Platts and Argus assess physical prices where no exchange trades — their published assessments settle a large share of real-world physical contracts.
- Physical traders: Vitol, Trafigura, Glencore, Cargill and peers move the actual barrels and cargoes; their logistics knowledge is the information edge financial players lack.
- Producers and consumers: oil majors, miners, utilities, airlines and food processors — the hedgers whose flows the speculative side exists to absorb.
- Regulators: the CFTC in the US, national energy regulators in Europe, plus the exchanges' own position limits and warehouse rules.
- Where the data lives: the EIA (US energy inventories, weekly), USDA (crops), the LME and exchange warehouse stocks, and the CFTC's Commitments of Traders positioning report — all free and market-moving on release.
Deep diveNumbers & conventions worth memorising
| Item | Convention |
|---|---|
| Crude oil | 1,000 barrels per contract; WTI delivers physically at Cushing, Oklahoma — the constraint behind April 2020's negative price |
| Natural gas | 10,000 MMBtu per US contract; European gas quotes in euros per megawatt hour |
| Grains | 5,000 bushels per contract; harvest and planting reports are the calendar's fixed points |
| Base metals | LME lots of 25 tonnes for copper, quoted in dollars per tonne, with daily rather than monthly delivery dates |
| Precious metals | Quoted per troy ounce; 100oz per gold futures contract |
| Carbon | One EU allowance covers one tonne of CO₂; December futures are the benchmark contract |
| Roll timing | Index funds roll on a published schedule — front-running that roll is an established (and crowded) trade |
The distinction that governs everything here: storable commodities have a cost-of-carry anchor; unstorable ones do not. Oil obeys arithmetic between spot and futures; electricity obeys the weather.
How this market works
DriversWhat moves prices here
What actually moves a price here on an ordinary day, and where to look for each one. Ordered roughly by how often it is the answer — not by how interesting it is.
| Driver | Which way it pushes | What to watch |
|---|---|---|
| Inventory | The level of storage, not the flow of production | A shortage is a storage number. The curve inverts when having the physical thing now is worth paying for. |
| The cost and availability of storage | It sets how far into contango the curve can go | When storage runs out the front contract has nowhere to go, which is how a price goes negative. |
| Weather and season | Predictable in shape, unpredictable in size | The seasonal pattern repeats because the physical world does; any single year does as it likes. |
| Politics and transport | A route matters as much as a reserve | Most supply shocks are about getting the thing from where it is to where it is needed. |
| The dollar | Priced in dollars, so the currency moves the price | A dollar move changes the price for everyone outside the United States without a single barrel changing hands. |
| The roll, for anyone holding paper | It can dominate the return entirely | Long-run index returns are mostly the shape of the curve, not the direction of the spot price. |
CalendarThe calendar this market keeps
Every market has a rhythm its regulars plan around and a newcomer discovers by being surprised. These are structural — they recur because of how the market is built, not because of anything happening this year.
| When | What happens | Why it matters |
|---|---|---|
| Monthly | First notice and expiry | The date a financial position becomes an obligation to take delivery of a physical thing. |
| Monthly | Index roll windows | Everyone holding the index rolls in the same few days, and the roll itself moves prices. |
| Weekly | Inventory reports | The scheduled release of the number this market is actually about. |
| Seasonal | Injection and withdrawal seasons | Storage fills in the shoulder months and empties in the peak — the calendar the curve is drawn around. |
| Harvest and planting | For anything grown | An agricultural year has fixed points at which uncertainty resolves. |
ConnectionsHow this market reaches the rest of the atlas
No asset class is a room with the door shut. A move here shows up there, through something specific — and knowing the route is most of knowing why a market you do not follow just moved the one you do.
- Foreign Exchange — An exporter's currency moves with what it exports, so the two markets are often one trade.
- Fixed Income — Energy and food are the volatile part of inflation, which is what the long end is priced on.
- Equity Derivatives — Producer shares are a levered version of the commodity, with the balance sheet added.
- Alternatives & Private Markets — Physical assets, infrastructure and trade finance all sit against the same underlying cargo.
Analysis
AnalysisThe analyst's checklist
- Storable or not? Storability decides whether the futures curve has an arbitrage anchor at all.
- Where am I on the curve, and what does the roll cost? In contango the roll can outweigh the price view entirely.
- Inventories versus seasonal normal — the deviation is the tradable information; the season itself is already priced.
- Who is the marginal producer? Their cost sets the floor; the marginal consumer's substitution sets the ceiling.
- What are the delivery mechanics? If you cannot take delivery, know exactly when you must be out.
- Position limits and expiry calendar — both are published, and both have ended trading careers.
AnalysisRed flags
- Right about the commodity, wrong about the roll — the most common way to lose money while being correct.
- Ignoring physical delivery: April 2020's negative oil price was a delivery-mechanics event, not a demand event.
- Treating an index product as spot exposure — the tracking gap compounds over years.
- Weather forecasts as an edge: the public forecast is in the price within minutes.
- Concentration in a single hub or warehouse — the LME nickel squeeze was a structural, not a fundamental, event.
- Backwardation read as bullish without checking whether it reflects scarcity or simply high storage costs elsewhere.
Storage arbitrage: what sets the curve
For a storable commodity the forward price cannot exceed spot plus the full cost of holding it — anyone could buy, store and sell forward for a riskless profit. That ceiling is full carry:
What the symbols mean
- Fthe forward or futures price
- Sthe price of the underlying today
- rthe interest rate, per year
- cthe coupon rate
Interactive: cash-and-carry against the futures priceMedium
- Full-carry futures price
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- Cost of carry
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- Futures minus full carry
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- Annualised curve slope
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- Reading
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Below full carry the gap is the convenience yield — what physical holders will pay for having the barrel rather than a claim on one. It rises when inventories are tight and goes to zero when tanks are full, which is exactly what the 2020 oil collapse demonstrated when storage itself ran out and the ceiling stopped working.
Weather settlement: degree days
Interactive: degree-day contract settlementHard
- Degree days vs. strike
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- Uncapped settlement
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- Actual payout
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- Cap status
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- Breakeven
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- Health warning
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Defaults are a gas utility short heating degree days — it receives when the winter is warm and it sells less gas. A cap makes the contract cheaper and removes protection against exactly the extreme winter that would hurt most. See weather derivatives.
Market mapWho is on the other side of your trade
Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.
- Producers hedge forward to secure financing — the structural sellers, and the reason a curve can sit below full carry for years.
- Consumers — airlines, utilities, food processors — hedge input costs. Their buying is budget-driven and calendar-bound.
- Merchants and trading houses hold the physical optionality: storage, transport and blending. They are the participants for whom the curve is an operating decision.
- Index investors hold long positions that must be rolled monthly regardless of the curve — a large, predictable and frequently front-run flow.
- Speculators supply liquidity to hedgers and are compensated for it, which is the honest version of the risk-premium argument for the asset class.
Costly mistakesThe five mistakes that cost the most here
Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.
- Buying a commodity ETC and expecting the spot price. You own a rolling futures position. In contango the roll cost is the dominant term — run the carry tool.
- Treating seasonality as an edge. Known seasonality is in the forward curve. What is knowable is priced; only surprises pay.
- Assuming a floor at zero. April 2020 settled that — a physical delivery obligation with no storage has no lower bound.
- Ignoring the difference between grades and locations. The contract specifies both, and the basis to your actual exposure is where hedges fail.
- Confusing a commodity with its producers. Mining and energy equities carry operating leverage, balance sheets and management — they are not a clean commodity exposure.
What an interview asks here
Commodity questions test whether you understand that the underlying has to be stored, moved and delivered — and that every quirk of the market comes from that.
Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.
Q1What is contango and why does it cost a long investor money?
What it is checking. The single most consequential feature of commodity investing, and it is frequently described backwards.
A complete answer contains:
- A curve where longer-dated futures are more expensive than nearer ones.
- An investor holding a rolling position sells the cheaper expiring contract and buys the dearer next one, so the roll costs money each time.
- That cost compounds, which is why a commodity index can fall over years while the spot price is flat.
- The opposite shape, backwardation, pays the roll, and it usually signals present scarcity.
- The curve shape is therefore a storage and scarcity statement rather than a forecast.
Read it properly: Commodities · Commodity future
Q2Why can an oil price go negative?
What it is checking. The 2020 event made it concrete, and the answer is about delivery rather than about value.
A complete answer contains:
- A physically settled future obliges the holder to take delivery at a place and a date.
- If storage at that place is full, taking delivery has a cost and no available buyer.
- So a holder who cannot store will pay somebody to take the obligation, which is a negative price.
- It is a statement about the delivery point and the expiry, not about the commodity being worthless.
- It also broke systems that assumed prices could not be negative, which was a modelling failure rather than a market one.
Read it properly: Negative oil, 2020 · Commodity future
Q3What is the convenience yield?
What it is checking. The concept that makes the cost-of-carry relationship work for commodities.
A complete answer contains:
- The benefit of holding the physical commodity rather than a claim on it — being able to run a refinery, meet a contract, avoid a stockout.
- It appears in the carry relationship as a negative cost, offsetting storage and financing.
- When it exceeds the cost of carry the curve is backwardated, which is why scarcity shows up as a curve shape.
- It is not directly observable; it is inferred from the curve, which makes it partly a residual.
- Which is why arguments about whether a curve is 'right' are frequently arguments about the convenience yield.
Read it properly: The storage calculator · Commodity future
Q4Why is a commodity hedge not the same as a commodity position?
What it is checking. The 1993 case makes this a live question, and it is about horizon mismatch.
A complete answer contains:
- A hedge of a long-dated physical obligation using short-dated futures has to be rolled repeatedly.
- So the hedger is exposed to the curve shape at every roll, even though the underlying exposure is unchanged.
- And the futures leg is margined daily while the physical leg is not, which creates a cash flow the hedge did not have.
- A hedge that is correct in aggregate can therefore require enormous cash before it pays anything.
- That combination — roll risk plus margin timing — is what turned a hedged position into a funding crisis in 1993.
Read it properly: Metallgesellschaft, 1993 · Hedging
Q5How do you own gold, and do the four ways behave the same?
What it is checking. A product question with a clean answer and one real trap.
A complete answer contains:
- Physical metal: no counterparty, and storage and insurance cost real money.
- A physically backed exchange-traded product: close to the metal, with a fee and a custody arrangement to read.
- Futures: leveraged, rolled, and exposed to the curve rather than to spot.
- Mining shares: an equity with operating leverage to the price, plus jurisdiction, cost and management risk. It is not gold.
- Two of the four behave like gold and two do not, and that is the whole of the answer.
Read it properly: Four ways to own gold · Precious metals spot
Q6What is a crack spread and who trades one?
What it is checking. A refining question that tests whether the candidate thinks in processing margins.
A complete answer contains:
- The difference between the price of crude and the products refined from it, expressed as a spread.
- It is a refiner's margin, so a refiner hedges it by selling the spread rather than by hedging either leg alone.
- Conventional ratios reflect typical output yields, which is why the spread is quoted as a combination rather than as one pair.
- It widens when product demand outruns refining capacity, which is a physical constraint rather than a financial one.
- So it is one of the clearest cases where a financial instrument is directly a business's operating margin.
Read it properly: The crack spread · Commodity future
Q7Why can a single participant break a commodity market?
What it is checking. The 2022 nickel episode, and the answer is about concentration and delivery.
A complete answer contains:
- Commodity markets are small relative to financial ones, and open interest can concentrate in few hands.
- A short position in a physically settled contract requires delivery, and if the deliverable supply is held tightly the short cannot cover.
- Price then rises without limit, because it is a scarcity of the deliverable rather than a valuation.
- Margin calls on that short escalate faster than any risk model assumed, threatening the clearing house itself.
- Which is why an exchange's ability to cancel trades exists, and why using it is so contested.
Read it properly: LME nickel, 2022 · Clearing and settlement
Do these against a clock → — one at a time, ninety seconds each, answer before you look.
Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.
Test yourself: five questions
Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.
Who pays whom, drawn
The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page. 4 of them carry a second diagram, folded shut, for what happens after the bargain is struck — clearing, delivery, custody. That half is deliberately separate: a clearing house is not a party to the bargain.
- Precious Metals Spot — What you pay a bullion bank, and what it owes you back
- Commodity ETC / ETP — What holding metal in a wrapper costs you
- Commodity Future — The hedge that has to be funded every day
- Carbon Allowances — An instrument whose supply is a political decision
- Commodity Swap — Hedging a barrel without ever seeing one
- Electricity Futures — Fixing the price of power you have already promised to sell
- Weather Derivative — Paying on a measurement, not on a loss
Who does this: Commodities is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.
The Commodities product shelf
Precious Metals Spot
Gold and silver, bought outright — the oldest financial asset, still trading like a currency without a country.
Explore →Commodity ETC / ETP
Commodities in a brokerage account: physical metal or futures strips, wrapped as listed securities.
Explore →Commodity Future
Standardised contracts on oil, gold, wheat and power — where the physical world sets its prices.
Explore →Carbon Allowances
A commodity invented by law: the right to emit one tonne of CO2, made scarce on purpose and tradable by design.
Explore →Power Purchase Agreement
A long-dated contract to buy electricity at a fixed price — the instrument that decides whether a wind farm gets built at all.
Explore →Commodity Option
Optionality on oil, gold and grain — almost always struck on the future, not the physical.
Explore →Commodity Swap
Fix the price of a flow: months or years of oil, gas or metal, settled in cash against published indices.
Explore →Electricity Futures
Futures on the one commodity that cannot be stored — where prices go negative at noon and 100× at dinnertime.
Explore →Weather Derivative
A contract that settles on the temperature, not on any asset. Invented so an energy company could hedge a warm winter — the purest example of a derivative with no underlying you can own.
Explore →Freight Derivative
A forward on the cost of moving cargo by sea. The most violent price series in commodities, hedged with a contract on an index nobody can deliver.
Explore →Concepts, comparisons and case studies about commodities
- EasyFour Ways to Own GoldCompareBars, an ETC, a future, and mining shares
- EasyShipping financeDealA mortgage on a moving asset, repaid from freight rates nobody can forecast
- MediumGlobal MacroIndustryTrading what a government or a central bank is about to do, in whichever market expresses it most cleanly
- MediumInfrastructure & Real AssetsIndustryOwning the thing itself — a road, a grid, a wind farm, a warehouse — and the contract that says who pays to use it
- MediumMetallgesellschaft, 1993Case StudiesA hedge that was economically sound and financially fatal
- MediumNegative Oil, April 2020Case StudiesFor one afternoon a barrel of oil was worth minus thirty-seven dollars — not because demand vanished, but because…
- MediumThe Other Side of the TradeAnalysisEvery position has a counterparty with a reason
- MediumTrade & Supply Chain FinanceIndustryFinancing goods between a shipment and a payment — where the document is the security and the counterparty is…