Who trades commodities?
Commodities are natural resources such as oil, gas, coffee and soy beans. Commodities are exchanged through future contracts on exchanges around the world by producers and buyers. When a future contract expires, these traders exchange the actual commodity. The second type of traders involved in the commodity markets are the speculators, i.e. traders who buy and sell commodities with the purpose of profit.
The two most heavily traded commodities are oil and gas, also known as hard commodities. Among the two, crude oil is the most important due to its extensive use in transportation and production. The price of oil is such a powerful world indicator that it can also dominate politics, as nations with high oil production tend to have substantial influence on the global financial system.
Why trade commodities?
Whether you are a trader or not, the prices of oil and gas affects us all on a daily basis. In the past, investing in commodities was limited to the people who had a significant capital as well as enough time and expertise. Access to the commodity markets today is available to non-professionals too, allowing online traders to capitalize both on short-term and long-term price fluctuations.
The energy markets have their own unique characteristics, which is why trading oil and gas is a popular choice among forex traders who want to diversify their trading. Known for their high liquidity, buying and selling oil and gas are available 23 hours a day throughout the trading week.
What influences the prices of commodities?
Unlike forex, where the value of a currency is closely linked to the performance of the economic area that uses it, the prices of commodities are heavily influenced by supply and demand. Here is what you need to know in order to track the key factors that determine supply and demand in the commodity sector.
The price of the US Dollar
Since commodities are priced in US Dollars, the fluctuation of the USD has a direct effect on the trading price of commodities such as oil, gas, coffee and soy beans.
Extreme weather conditions, such as hurricanes, tsunamis and earthquakes, can have a dramatic effect on the prices of commodities.
Geopolitical forces have a direct impact on the energy sector, which can be seen both as a risk and an opportunity. International diplomacy, civil disruptions and exchange rate fluctuations can increase volatility in the oil and gas markets substantially.
OPEC’s production targets
When it comes to oil trading, OPEC is a key organisation to keep an eye on. The Organization of the Petroleum Exporting Countries is comprised of 14 nations. OPEC sets production targets for its members in order to regulate the supply. As a rule of thumb, when production targets are reduced, the price of oil rises.
Advantages of trading commodities
Trading commodities has become one of the most popular ways to diversify a portfolio, especially during bearish stock markets, as commodities tend to move in the opposite direction to stocks. Other reasons why traders choose to trade commodities online are below:
Available 23/6 hours
When it comes to energy commodities, the oil and gas markets are available around the clock with just one hour break throughout the trading week. All you need to participate is a trading account with a reliable broker.
The commodity markets are heavily traded in large volumes by different participants in the world, offering several trading opportunities to both short-term and long-term traders.
Go long and short
Unlike traditional investing, that involves buying and holding in hopes of price appreciation, you can profit both from price jumps up and down by going either long or short. At ThinkMarkets, you can start trading the highly volatile commodity markets with a starting capital of as low as £250.