Why does almost nobody trade the physical commodity?

There is a real market in actual barrels, bushels and tonnes. It is called the physical or spot market, it moves the world's material economy, and almost nobody reading this will ever participate in it. Understanding why explains the shape of everything else.

What buying a commodity actually involves

Suppose you want 1,000 barrels of crude — one standard futures contract's worth. In the physical market that means arranging:

• a seller with that grade available at a location you can reach;
• an assay confirming the API gravity and sulphur content of that specific parcel;
• inspection by an independent surveyor at loading and discharge;
• transport — a pipeline nomination, a truck, or space on a vessel;
• storage — a tank you own or rent, with a lease that starts on a date;
• insurance, a letter of credit, and a contract specifying who pays demurrage if the ship waits;
• and, eventually, a buyer, because the oil does not go away on its own.

Now do the same for 5,000 bushels of corn (a truck, a silo, moisture testing) or 25 tonnes of copper (a warehouse account and a forklift). None of this is exotic to a commodity trading firm. All of it is impossible for someone who simply wants exposure to the price.

What the futures market standardised

A futures exchange takes that entire mess and fixes everything except the price:

• Grade — written into the contract specification, with defined substitutions and discounts.
• Quantity — one contract, always the same size.
• Delivery location — a named hub or a list of registered warehouses.
• Delivery period — a stated month.
• Counterparty — the clearing house stands between buyer and seller, so you are not researching who you traded with.

With five of the six variables frozen, the only thing left to negotiate is the sixth. That is what a futures market is: a machine for isolating price from logistics.

Almost none of it is ever delivered

Here is the fact that surprises people: on most contracts, well under 2% of open positions go to physical delivery. Nearly everyone closes out before expiry. Which raises the obvious objection — if nobody delivers, why is the delivery mechanism there at all?

Because it is the anchor. The right to demand delivery, and the obligation to make it, is what forces the futures price to converge to the physical price as expiry approaches. If the futures contract traded $5 above physical oil at Cushing with a week to go, someone would buy the physical, sell the future, deliver, and pocket the difference — and that trade closes the gap. Delivery is rarely used and constantly load-bearing, like the emergency brake in a lift.

Two mechanisms exist, and it is worth knowing which you are looking at:

• Physically delivered — WTI crude at Cushing, Oklahoma; CBOT corn against registered shipping certificates; LME metals from listed warehouses. Holding past the deadline means an actual obligation.
• Cash-settled — ICE Brent settles against the ICE Brent Index; CME lean hogs against the CME Lean Hog Index. No goods move; the final settlement is a payment referencing a published physical price.

The paper-to-physical ratio, and why it is a feature

A benchmark crude contract regularly trades over a million contracts in a day. At 1,000 barrels each, that is more than a billion barrels of notional turnover against world consumption of roughly 100 million barrels a day — paper volume many times physical throughput.

That ratio is periodically presented as a scandal. It is closer to the opposite. Every one of those trades is somebody willing to take the other side, and their collective presence is why a producer can hedge a year of output in an afternoon without moving the market against itself. A market with only physical participants would be a market where a farmer waits for a miller with exactly the opposite need on exactly the same day. Unit 4 takes that argument apart properly.

In the data

Futures data comes in two forms. A continuous series such as "crude oil" always shows the nearest contract and rolls to the next one as each expires; a dated contract is one delivery month, with its own price until it expires. Below are the continuous front of WTI crude and three December contracts further out, each at its last settlement.

On 29 September 2026 they read $92.60 for the front, $74.68 for December 2027, $69.79 for December 2028 and $63.12 for December 2030: one barrel at Cushing, four delivery dates, four prices. The futures list that day held 227 instruments, 49 continuous series and 178 dated contracts, and crude alone had twenty-one dated contracts, from October 2026 out to December 2030.

Try it now

1. The continuous crude series over a year is below. Notice how continuous and dense it is, although every bar belongs to a contract that has since expired or will. That continuity is a product of standardisation, and it is what the physical market cannot give you.

2. Write down, for one commodity you find interesting, the six things a futures contract fixes and the one it leaves free.
3. Answer in one sentence: if fewer than 2% of contracts are delivered, why can't the exchange just remove the delivery clause? (If your answer mentions convergence, you have it.)