How are commodities bought and sold?
You may not notice it in your daily life, but behind every purchase you make at the supermarket or simple actions like turning on the heating, there is a huge global market operating every single day: the commodities market. We already understand what commodities are, but do we really know how these raw materials are bought and sold?
Although in the physical world we see them in trucks, ships, or warehouses, in the financial world commodities are traded in much more complex ways. Depending on how they are negotiated, they can have different prices, timelines, and risks. Have you ever wondered why gasoline prices vary so much even though the product itself stays the same? Let’s explore the main ways in which commodities are traded.
Types of Commodity Trading
1. Spot Trading
This consists of buying or selling a commodity immediately (or almost immediately) at the price it has at that moment. The price to be paid is called the “spot price.” For example, if a refinery needs oil to operate next week, it can buy barrels at the spot price and receive them within a few days. Although it’s a quick and easy way to operate, it can be more expensive depending on supply and demand and potential price fluctuations.
2. Futures Contracts
These are agreements to buy or sell a commodity at a future date but at a price agreed upon today. In this way, the producer secures a minimum profit in the coming months, and the buyer ensures they won’t pay more if the commodity price rises. These contracts are traded on specialized exchanges, such as the Chicago Mercantile Exchange (CME), and are standardized (meaning they all have the same size, date, and conditions). With the right knowledge, this form of trading can be very advantageous as it allows speculation on price movements.
3. Commodity Options
This is similar to the previous case but with a key difference: it grants the right to obtain the commodities in the future at a fixed price, but without the obligation to do so. Imagine a company buys an option to acquire oil at €75 per barrel. If in three months the price rises to €95, they exercise the option and profit. But if it falls to €65, they don’t use it and only lose the premium. This is a safer option since the loss is limited, but the premium cost is usually high.
4. Long-Term Contracts
Many commodities are traded through private contracts between companies, known as long-term contracts or “off-take agreements.” These contracts set a stable price agreed upon between both parties and can last several years. This type of agreement is common in industries such as energy or mining, where long-term planning is necessary. It also ensures a lasting relationship between companies.
In summary, each type of trading meets different needs: from immediate delivery to protection against uncertain prices or planning large industrial projects.
This helps producers, traders, and investors manage risks and seize opportunities in global markets.
We must not forget that commodity trading is essential to the global economy and moves millions of euros in financial markets. As we have mentioned several times, there are external factors that can affect their prices. In the next article, we will explain what these factors are.
