CURRENT MARKETS
Types of Commodities
What does an option contract look like?
Energy
Despite a global movement towards renewable and sustainable energy, gasoline and oil remain the main sources of energy for vessels, aircraft, automobiles, and more. Each and every year, the global population increases, and therefore so does the number of cars on the road and the amount of fuel consumed. The BRIC economies, which stands for Brazil, Russia, India, and China, are all huge oil and gasoline consumers.
In winter and spring, countries in the Northern Hemisphere start to stockpile gasoline in anticipation of the summer months. Once the sun starts shining, people start going on holidays, going on trips, and generally getting out and about. All that travel needs a lot of fuel. Just think how many cars set off for Spring Break every year. The higher the demand for fuel during this time, the higher the prices are likely to be. However, this also brings a potential for volatility. If you have a high demand for something but the supply chain is disrupted, prices could spike even higher than expected. Let’s say that some of the refineries are disrupted by snowstorms or break down due to an arctic freeze in the winter months. Suddenly, not as much gasoline can be transported to the Northern Hemisphere in time for that summer rush and, therefore, prices spike.
Heating oil is another example of an in-demand energy product – in fact, it is often referred to as Number 2 Fuel Oil. Out of all crude production, it accounts for around 25%, beaten only by gasoline. For heating requirements in the Northeast of the United States in the winter months, heating oil makes up around 80% of total usage. It is also used in Canada, Europe, and Russia. In the summer and fall, the oil industries start to stockpile heating oil in order to prepare for the colder weather. The colder it gets, the higher the demand for heating, and the higher prices for heating oil go. However, this can also create potential volatility if the supply chain is disrupted, and demand goes through the roof. Let’s say a hurricane disrupts transportation from refineries in the Gulf of Mexico just before an extremely cold winter. Suddenly, the demand for heating oil is very high but the supply is not where it was expected to be, so prices spike.
Grains
Wheat is seen as the single most important food grain on the planet for humans. With the global population on the rise year-on-year, the demand for wheat is also rising. In America, wheat is usually harvested between the spring and the start of summer. During this harvest time, and even just before it, the prices for wheat are very low. This is because the supply is so high it can easily cope with the global demand. All this wheat floods the market at the same time, keeping prices nice and low. Farmers usually plant for the winter season in September, which is when wheat prices often strengthen. Wheat is very temperamental when it comes to planting. The window is narrow and if you plant too soon, it may dry out the soil, and if you plant too late it may not survive the winter. This small room for error creates volatility during September, as one minor disruption can have a huge impact on the eventual wheat production. If the market fears there may not be as much wheat as expected/required, prices may spike.
Corn
Corn is the most important source of food for livestock such as cattle, while it is also used in America to make ethanol which is a key ingredient for things like gasoline. Of course, corn also goes into a number of human food products, including corn syrup.
Just like with wheat, corn prices usually go up and down depending on the time of year/harvest. The most noteworthy period in the yearly corn price cycle falls between mid-summer and the harvest period. Harvest usually takes place between September and November every year, which floods the market with supply. The more corn there is available during this time, the lower the prices fall. Between December and February, the corn prices usually hit their bottom mark for the year and will typically start to rise again after this point. In June and July, corn is usually at its most expensive due to inventories dwindling and any potential disruption to the new corn production cycle. You can see particular volatility between April and August, which is the growing season. This is because the crop can become damaged if it is planted late, and prices may spike due to any concerns surrounding supply levels.
Metals
Copper
Believe it or not, copper is one of the oldest commodities in the human world. It can even be used to assess the state of the global economy, such is its influence. Only iron and aluminum are used more across the world than copper. Copper is most heavily used in the construction industry, as well as the industrial manufacturing space. The way to make money out of copper is to mine it efficiently. That means high volumes at low costs. However, copper supply can be quite volatile due to the political state of the countries in which it is mined. Humans started mining copper around seven thousand years ago because it was soft and easy to mine/mold into tools. Two thousand years later and humans found they could alloy copper with tin to create bronze – kickstarting the bronze age. Since then, copper has been a very valuable global commodity.
Aluminium
Aluminium
is now a key material in the modern economy. It is used in the field of aerospace, for packaging such as drinks cans, in the construction process for automobiles, and much more. Transport is the biggest consuming sector for aluminum, taking up around 30% of the production in America, with packaging and construction making up 20% and 10% respectively. Those electric transmission lines that you see in your day-to-day life are usually made of aluminum.
Precious Metals
Gold
Gold has long since been a marker of wealth across the globe. It is particularly popular during the Christmas season and around Indian Festivals. India is actually among the largest gold consumers on the planet, with millions of people celebrating Indian festivals between September and December every year. China and India are tied as the two largest gold consumers in the world.
China is now also a growing gold consumer after regulations and licensing relaxed in recent years. Foreign and local companies can now get involved in the gold market and consumers have a larger range of sellers to choose from. The economy in China is prospering at the moment, which is partly why the demand for Gold is increasing, as the middle class in the country grows too. Over the next ten years, it is thought that gold demand in China could double. 64% of this gold demand comes from the jewelry trade, while investment demand in gold has increased by 70% since 2010.
Due to Christmas and other global festivals, people give and receive gifts most often in December, followed by February (Valentine's). Of course, jewelry is among one of the most popular gifts, which is a huge boost to the gold trade. In the summer and the winter, from June to December, wholesalers start to stockpile jewelry for the upcoming festivities. The predicted increased demand around Christmas and Valentine's can result in a price spike.
We have also seen growing alternative gold investment in recent years, with things like retirement portfolios turning to the precious metal as an option over paper assets like shares. Amid uncertainties around the global economy and volatile markets, gold has long been seen as an asset that holds its value well.
Silver
Silver has been a popular metal among humans for thousands of years now. At the start of this obsession, silver deposits were relatively easy to find close to the surface of the Earth. Over the years, we have found countless relics, artifacts, jewelry and more from ancient civilizations, all made from silver.
In 1792, America’s entire economic system was linked closely with silver. The silver dollar was at the forefront of the US monetary system and the currency revolved around how silver compared to gold. In fact, silver was the main material for American currency until 1965.
Around the 2000 mark, we found a more important use for silver, far beyond money. Instead, the precious metal was used as a raw industrial material. To this day, it is primarily seen as a valuable commodity in the construction and industrial sector, which is also why it often proves to be a solid investment. The jewelry industry, electronics, and photographic equipment are the three biggest silver users in the world.
Most of the global silver supply comes directly from newly mined metal, found mostly in Peru, America, and Mexico. However, there are some secondary sources still, including scrap metal, melting old coins down, and hoarding supplies in certain countries. That being said, secondary sourced silver is more sensitive when it comes to the price.
Price risks can be managed by using the COMEX Division silver futures and options contract. Much like gold, silver is also often seen in investment portfolios.
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Platinum
The platinum metal group is made up of six metals, including platinum itself. The others are palladium, rhodium, ruthenium, osmium, and iridium. Each one is uniquely different and has its own physical and chemical qualities. Thus, they also each have their own uses within the industrial landscape. 51% of platinum demand comes from the jewelry trade, while 29% and 15% go to automotive catalysts and petroleum refining catalysts respectively. 7% of platinum use comes from the computer industry thanks to its electrical conductivity, and the fact is does not often react to other metals and does not corrode.
However, one of the main problems with platinum is that there isn’t much left on Earth. Around five million troy ounces are mined per year, compared to 547 million ounces of silver and 82 million ounces of gold in each 12-month cycle. Most of the world’s platinum can be found in South Africa (80%), while Russia and North America hold about 11% and 6% respectively.
Prices for platinum can be volatile due to the high importance, and high demand, but low production. There are also not many suppliers of platinum in the world, so prices can be controlled by the few. For that reason, it is seen as an attractive investment opportunity by some.
Coffee/Sugar
Coffee
This will come as no surprise to you, but coffee is one of the most popular drinks in the world. Did you know that over 400 billion cups of coffee are drunk every year? Most of our cups are filled from coffee beans grown in Brazil, Colombia, and Vietnam – although over 33% comes from the former of those three. As such, any disruption experienced in the Brazilian supply chain can have serious knock-on effects on the entire global coffee supply. If Brazil suffers from pests, diseases, a lack of rain, or damaging weather, coffee prices can spike over a fear of lack of supply. The flowering period for Brazilian coffee, which is a hugely important time in the cycle, happens in October.
If it’s Robusta coffee you are looking for then Vietnam is the top producer and exporter in the world. These types of beans are used to make instant coffee. These beans are harvested in Vietnam between October and January. If the rainy season extends longer than usual or the typhoon season appears earlier than expected, Vietnam supply chains can be disrupted, and Robusta prices can spike.
Coffee consumption usually increases during the winter months in the Northern Hemisphere due to the cold weather. If Brazilian or Vietnamese supply changes are disrupted during these high-demand months, prices can spike. It is also worth noting that prices usually go up between November and May due to the Brazilian frost season, which can impact supply.
Sugar
It comes as no surprise that prices for sugar usually peak during the holiday months. All that chocolate, cake, cookies, and more produced specifically for Halloween, Christmas, and other festivals/festivities needs a lot of sugar. This marriage of supply and demand in December usually results in an end-of-year price peak. However, European sugar crops do not hit the market before this time of year, while Brazil does not make sugar between December and April. Volatility in sugar pricing can increase if the harvest is delayed by extreme weather conditions.
Meat
Humans get through a lot of meat from year to year. However, prices do change throughout the seasons for a number of reasons. There can be changes in the demand for meat and the supply of animals, for example, or often a combination of the two. Beef/steaks are more popular between spring and summer time, as warm weather leads to more barbecues and holiday meals out. From March to May, the supply of meat slows down, sometimes due to animal birth rates and increased slaughter during summer to fall months. We can see increased price volatility during this time as peak summer barbecue weather is just around the corner. You also have to take into account the varying price of corn, which feeds the animals in question, only making meat prices even more volatile. Between July and September, the market is often flooded with extra cattle, meaning a high supply of beef. Between September and October, barbecue season has been and gone, leaving the market with a healthy beef stock. Low demand and high supply during this team see prices fall.
