Commodities

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 yield

Compute the storage-arbitrage fair forward, and back out what the market's actual forward says about physical scarcity.

Spot price Market forward (1y) Interest rate % Storage cost % p.a. Horizon T (years)

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.