Introduction to Commodity Trading

Trading Commodities

Commodity trading may prove very profitable if you can recognize and follow the long-term commodity cycles. 

 

1. Trading Oil Price Volatility

Historically, the price of oil moves in a wide price range from 30 to 150 U.S. dollars per barrel. The capital leverage taking place on derivative markets gives a good explanation of excessive short-term fluctuations of the oil price.

Two International Oil Types

There are two main types of oil:

1) Brent

Brent oil is the combination of 15 different types of oil. Brent is priced with a market premium of about $4-5 per barrel in comparison to Opec Basket price (Opec Basket is mentioned later).

2) West Texas Intermediate (WTI)

WTI oil is characterized by high quality, therefore, is mainly used for gasoline production. Historically, WTI is priced with a market premium of about $1-2 per barrel in comparison with Brent and $5-7 per barrel in comparison to the Open Basket.

How the Price of Oil is determined

There are three main ways to determine the price of oil: (a) NYMEX, (b) Opec price, and (c) Imported Refiner Acquisition Cost.

1. NYMEX Futures Price

2. The Opec Price (OPEC Basket)

3. US Imported Refiner Acquisition Cost (IRAC)

Methods to speculate on Oil Price fluctuations

  1. Derivatives (Futures and Options contracts)
  2. CFDs and CFDs on Futures (explained below)
  3. Buying shares of Oil Companies
  4. Buying an Oil Mutual Fund
  5. Buying an Oil-Stock ETFs (Exchange Traded Funds)

► Basic Information About Oil Trading

 

2. A Historical View of the Price of Gold

The total amount of available gold in the world today is about 156,000 tons. Each year only 2,500 tons are mined from which the 2,000 tons are absorbed by the jewelry industry and the rest 500 tons are used as investment gold.

Looking at the historical fluctuations of the Gold Price

Gold Rally during the 70s

In 1971, the Bretton Woods system was officially ended. By that time, the price of gold was traded for only $41/Ounce while ten years later, in 1980, the price of gold exceeded $600/ Ounce.

Agreements and key systems to control the price of gold until 1971

  1. GOLD STANDARD RULE

  2. BRETTON WOODS FIXED RATE SYSTEM

  3. WASHINGTON AGREEMENT ON GOLD (WAG)

Gold prices during the period 1257-1945 (British Official Price)

Thanks to the excellent records of the United Kingdom we are able to trace with accuracy the price of gold (from year to year) from 1257 until 1945 when the Official UK Price has ended (British Official Price).

Countries with the highest Gold Reserves

In the list of the countries with the highest gold reserves per-capital, Switzerland is found at the top, followed by Lebanon and Germany. As concerns countries with the highest total reserves -U.S. is on the top holding 8,134 tons of gold, followed by Germany holding 3,401 tons of gold.

► Historical Price of Gold

 

 

3. Contract for Difference (CFD)

A Contract for Difference or else a CFD is the perfect tool for trading commodities. CFDs offer a low-margin requirement plus a wide range of options for commodity traders.

What is a Contract for Difference (CFD)?

A Contract for Difference or a CFD is a contract between two parties which are willing to speculate on the price movement of a financial asset. A CFD contract exchanges the difference between the entry price and exit price of a particular financial asset. A CFD may be used for speculating stocks, stock indices, currencies, commodities or even other financial assets (volatility, inflation, etc). A CFD consists of two prices, the price at the time that is opened, and the price at the time it is closed. If the underlying financial asset rises in price, the buyer of the contract is paid from the issuer of the contract. The CFDs do not have a specific expiry date like for example options contracts -CFDs are renewed at the close of each trading day, and depending on the trader decision, they are rolled forward or abandoned.

This type of instrument may be used for speculating both upward (long positions) and downward (short-positions) price movements. Capital leverage can also be used and reach 50:1, or even more. Keep in mind that CFDs are not standardized products so each CFD broker has its own terms and conditions.

CFDs Common Underlying Financial Assets:

  • Trading Gold CFDs (against USD or Euro)

  • Trading Silver CFDs (against USD or Euro)

  • Trading Platinum, Copper, and other metals

  • Trading Wheat, Sugar, Coffee, and other soft-commodities

  • Trading Crude, Brent, Natural Gas, Gasoline, and Carbon

Tip:

Prefer to trade using CFDs on Futures, they offer a great advantage for commodity trading. CFDs on Futures charge zero (0) swap rates for maintaining your positions overnight and that makes them ideal for swing trading. CFDs on Futures are offered in higher spreads than common CFDs but if you keep your positions more than 2-3 days they become instantly a very cost-effective solution. 

Compare CFD Brokers

 

■ Introduction to Commodity Trading

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