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Commodities II.

Leveling up commodities

Learn about spot prices, futures, and commodity funds.

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How Commodities Are Traded: Spot Market 

In the spot market, commodities are bought and sold for immediate delivery at current market prices. 

Transactions occur "on the spot," reflecting real-time supply and demand. 

Spot trading is common for physical commodities where producers and consumers need immediate exchange, such as farmers selling crops or manufacturers purchasing metals. 

Prices in the spot market serve as a benchmark for futures contracts and are crucial indicators of current market conditions.

EnergyCo Scrambles to Adjust in the Spot Market 

After the Ostara crisis pushes oil prices up, EnergyCo increases production to sell more crude on the spot market,  where prices are highest.

Emergency meetings help the company manage resources and avoid overextending. 

But independent refineries, which rely on buying crude rather than producing it, struggle to afford supply as spot prices surge.

EnergyCo’s quick move shows how producers react to price spikes. Short-term gains for sellers can mean rising costs and tough choices for buyers downstream.

What are Commodity Futures?

Commodity futures are contracts to buy or sell a raw material, like oil, soybeans, or steel, at a set price on a future date.

They are standardized and traded on exchanges, allowing producers and consumers to hedge against price fluctuations. 

For example, a farmer can lock in a price for their crop before harvest, protecting income if prices fall due to a market glut.

Investors also use futures to speculate on price movements, aiming to profit from market volatility.

A Retail Investor Bets on Oil Futures 

Daniel, a retail investor, sees a chance to profit from the oil crisis triggered by the coup in Ostara. He buys oil futures contracts at $110 per barrel, speculating that prices will rise further.

If prices go up, he can sell the contracts for a gain. But if they fall, he could lose a lot of money, depending on how far prices drop and when he exits.

Futures trading lets investors bet on price moves without owning the commodity. It’s risky and fast-moving, and not for everyone.

Commodity ETFs and Mutual Funds 

Commodity Exchange-Traded Funds (ETFs) and mutual funds offer investors indirect exposure to commodities without dealing with physical goods or futures contracts.

These funds invest in commodity-related assets, such as futures, stocks of commodity-producing companies, or physical commodities stored securely. 

They provide diversification, liquidity, and ease of trading through regular brokerage accounts. 

This way, retail investors can participate in commodity markets more easily.

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