Commodities foundations — course checkpoint

You began with a word — commodities — that mostly meant "gold and oil". You finish able to say what a commodity price specifies, why energy moves the way it does, why metals and crops run on different clocks, and what sits inside the wrappers people hold them through.

Unit 1 — what makes a commodity different

A commodity is a physical good, interchangeable within a defined grade, that must be produced, stored, transported and consumed. Holding it therefore costs money: six months of storage and financing on $75,000 of oil costs about $4,875, roughly 6.5%, for no change in what you own. That negative carry is why the calendar belongs to this asset class.

It has no cash flows either, so discounting does not apply and the analysis is a balance: a 0.6 million b/d deficit removes 18 million barrels from inventories in a month, and the buffer decides whether that is a shock. And there is never one price — grade + delivery point + delivery date = a price, everything else quoted as a benchmark plus a differential. Futures freeze all of that and leave only price free; well under 2% of contracts are delivered, yet delivery is what forces convergence.

Unit 2 — energy

WTI is a tank in Oklahoma; Brent is a ship in the North Sea, and the spread between them is mostly a transport-economics number: exceed the roughly $4.50 cost of relocating a barrel to Europe and barrels move until it closes. A refinery is a converter, long the crack spread — $28.60 a barrel at $2.40 gasoline, $2.60 distillate and $75 crude.

Natural gas is the tyrant of the calendar. Hard to store and hard to move, so there is no world price: European gas near €340/MWh in 2022 was roughly ten times Henry Hub. Storage runs April–October in, November–March out, and a cold snap of 15 Bcf/day for ten days removes 150 Bcf — about 4% of the national buffer. Hence 10–20% sessions on a forecast. Underneath it all: with short-run demand elasticity near −0.05, losing 1% of supply needs roughly a 20% price move to clear.

Unit 3 — metals and agriculture

Gold is a stock, not a flow — 3,600 tonnes of new supply against roughly 210,000 tonnes above ground is 1.7% a year, so price is set by who holds the existing stock, and its competitor is the real yield. Copper is a barometer with a decade-long supply lag, so surprises are resolved by price and inventory alone.

Grains live on two hemispheres' calendars, and old crop and new crop are different goods — which is why a July drought can move December corn and July corn in opposite directions. The number that matters is the stocks-to-use ratio: 1.5 ÷ 14.5 billion bushels = 10.3%, or 38 days of cover. Softs and livestock break the remaining rules: perennials cannot answer a price signal for years, and livestock cannot be stored at all, so there is no cost-of-carry link between contract months.

Unit 4 — how commodities are accessed

Producers are structurally long and sell futures; consumers are structurally short and buy them. Size, timing and direction mismatches mean the two sides never balance, so the residual is carried by participants with no use for the commodity — which is what makes the hedge cheap. Hedging swaps price risk for basis risk.

Futures give the most precise exposure and the most operational load: a first notice day with a physical obligation behind it, and a roll about twelve times a year. 20 April 2020 — May WTI settling at −$37.63 because Cushing's spare capacity was already leased — is the standing proof that a physically delivered future is a claim on a real thing in a real place. The wrappers hold different assets entirely: a bar in a vault (0.1000 oz becomes 0.0980 oz over five years at a 0.40% fee), a rolling futures position (100 contracts at $75 becomes 97.4 at $77 before the price has moved), or a company, whose $400/oz margin becomes $600/oz on a 10% gold move but which also carries grade, jurisdiction, cost inflation and equity beta.

The three sentences worth keeping

1. A commodity price is a grade, at a place, on a date.
2. Nothing here pays you for waiting — storage, financing and the roll run against the holder.
3. Inelastic demand plus slow supply equals large moves, and the buffers explain the size.

Before you sit it

Each of these is a minute at your desk. Any one that is not names the lesson to reopen first.

• Say why a discounted cash flow cannot value a barrel of oil — Why can't you value a barrel of oil the way you value a share?
• Name what separates WTI from Brent, beyond the name — What's the difference between WTI and Brent?
• Say why copper gets called a barometer — Why is copper called a barometer?
• Say what you are actually holding when you buy a commodity ETF — ETF, ETC or mining share: what are you actually holding?

Try it now

1. One from each sector is below — energy, metal, grain — over the same twelve months. For each, write down its grade, its delivery point and the calendar that governs it, then use Measure high to low and add the percentage range to the row. Three sectors, three clocks, three very different numbers.

2. Redo one calculation per unit: the 3-2-1 crack at $2.30 gasoline, $2.70 distillate and $80 crude ($22.20); stocks-to-use at 1.8 ÷ 13.9 billion bushels (12.9%); and the roll from 100 contracts at $80 into a next month at $82 (97.6 contracts).
3. Write four sentences — one per unit — plus a fifth on what a price still cannot tell you.

Checkpoint quiz next, then the curve in depth and what drives physical markets. Nothing here was a recommendation to hold or avoid anything, and nothing here predicts a price. You have learned how the physical economy is priced — a skill, not a signal.