Commodities: What Oil, Wheat, Coffee and Gold Have in Common

What a commodity is

A commodity is a raw, physical good that is standardised and fungible. Standardised means graded to a published specification. Fungible means one unit is as good as another: a barrel of Brent from one tanker is interchangeable with a barrel from the next. That is what lets a commodity trade on an exchange at one benchmark price for each grade and delivery point.

Commodities fall into three families:

• Energy — crude oil, natural gas and refined products such as gasoline.
• Metals — precious (gold, silver, platinum, palladium) and industrial (copper, aluminium).
• Agriculture — grains (wheat, corn, soybeans) and softs (coffee, sugar, cocoa, cotton).

Oil, wheat, coffee and gold span all three families. What follows is what they share.

What they have in common

They are priced in US dollars

Brent in London, wheat in Chicago, coffee in New York, gold everywhere: the benchmark prices are dollar prices. When the dollar strengthens, a commodity becomes dearer for every buyer who earns euros, yen or rupees, and demand softens. So a stronger dollar tends to press on commodity prices, and every commodity trader is, in part, a dollar trader. Natural gas is the exception: it has regional prices, and the one you trade is the US benchmark.

Price comes from physical supply and demand

A currency pair has no harvest. A commodity does. Wheat and coffee move on weather and yields; a frost in Brazil can reprice coffee in a morning. Oil moves on OPEC+ (the oil exporters' group and its allies), pipeline outages and inventories in storage. Gold moves on investment flows, central-bank buying and jewellery demand; mine output matters far less, because almost every ounce ever mined is still above ground. Something real is being produced, stored and, gold aside, consumed, and the price is the market's estimate of how tight that balance is.

Seasons and cycles

Grains follow the planting and harvest calendar, so uncertainty peaks while the crop is in the ground. Natural gas has a winter, when heating draws down storage. Gasoline has a summer driving season. Gold's cycle is not on the calendar: it follows real interest rates — the yield on safe bonds after inflation — and fear. When real yields fall, holding a metal that pays no interest costs less, and gold tends to rise, though since 2022 central-bank buying has often outweighed real yields.

The futures curve

Commodities are traded for delivery on dates. Oil for next month has one price; oil for six months out has another. Plot those prices and you have the futures curve. When later dates are dearer the curve is in contango, which usually means supply is comfortable. When later dates are cheaper it is in backwardation: the market wants the goods now.

A futures trader who holds a position must roll it from the expiring contract to the next, and the roll costs or earns the gap between the two. A broker's cash or spot CFD has no expiry, so there is nothing to roll; instead the cost of holding the position from one day to the next — the cost of carry, plus the broker's financing charge — appears as the overnight swap. Different route, similar economics. The swap is the broker's number, so read it in the contract specification.

Scheduled reports move them

Each family has a calendar:

• Weekly inventories from the US Energy Information Administration (EIA): petroleum on Wednesday, natural-gas storage on Thursday.
• The US Department of Agriculture's monthly WASDE (World Agricultural Supply and Demand Estimates) for grains.
• For coffee, the daily count of certified stocks at ICE (Intercontinental Exchange), and the estimates of the Brazilian crop, from the US Department of Agriculture and from Brazil itself.
• Central-bank decisions, Fed communications and real-yield moves for gold.

Know the date and time before you open a position, as you would for payrolls in forex.

Units and contract sizes differ

Oil is quoted per barrel (42 US gallons). Wheat per bushel (60 pounds). Coffee per pound. Gold per troy ounce (31.1 grams). On the exchanges one futures contract is 1,000 barrels of crude, 5,000 bushels of wheat, 37,500 pounds of coffee and 100 troy ounces of gold, and a broker's lot may be a different size again. So "1.00 lot" is a different amount of money at risk in each market. Read the contract specification before you size a position, every time.

Volatility

Commodities move more in a day than the major pairs. Natural gas and coffee are famous for it; a 5% day in natural gas is not unusual, and coffee has had plenty. Same risk, bigger range, so the position must be smaller. The position-sizing formula still applies; only the inputs change.

Geopolitics and inflation

Commodities are where inflation and conflict show up first, because they are the inputs to everything else. Gold is the market's "fear" asset, bought when confidence in currencies or governments wobbles. Oil is its "conflict" asset, repriced within minutes of news from a producing region. Wheat reacts to war and export bans because a handful of countries grow most of the exportable surplus.

Where they differ

Those hours describe the underlying exchanges. For the instrument you trade, see the contract specification.

Commodities at NPE Market

The commodity board at NPE Market is energy: UKOIL.c for Brent, USOIL.c for WTI and XNGUSD for natural gas. Metals have their own board: XAUUSD and XAGUSD; gold and silver against the euro and the Australian dollar as well; gold by the gram; and platinum, palladium and aluminium against the dollar.

All of these are cash (spot) contracts with no expiry. There is no delivery month, no roll date and no settlement that closes a position for you. Holding a position overnight carries a swap. The swap, contract size, margin and trading hours of each instrument are in the contract specification in the platform, not here.

Before you trade one

1. 1.Start with one instrument. Gold and Brent are the usual choices: deep, well documented and covered by every news desk.
2. 2.Size by the range, not by the lot. Take the average daily range from the chart, set the stop from that, and let the position-sizing formula give the volume.
3. 3.Know the report calendar. Put EIA Wednesdays (oil) and Thursdays (gas), WASDE and the Fed in your diary. A position held into a report is one you have chosen to gamble with.
4. 4.Respect the dollar. Check the dollar index or EURUSD first. Buying gold while the dollar is rising is a bet against yourself.

Summary

• A commodity is a standardised, fungible physical good, which is why it trades at a benchmark price.
• Oil, wheat, coffee and gold share a dollar price, real supply and demand, seasons, a futures curve, a report calendar, awkward units and more volatility than forex.
• At NPE Market, energy and metals are cash CFDs with no expiry; the carry is the overnight swap; the figures are in the contract specification.
• Start with one, size for the range, know the dates, watch the dollar.

Three questions beginners ask