Commodity Spot Markets: Energy, Metals, and Agricultural Products

Commodity derivatives trade on physical markets where inventory matters. Unlike a stock portfolio, you cannot short a barrel of crude oil without either borrowing physical oil or entering a futures contract — and you cannot conjure a tonne of copper from nowhere to meet a delivery obligation. The physical reality of production, storage, and consumption constrains the no-arbitrage price relationships in ways that do not apply to financial assets. Understanding these physical markets is the prerequisite to understanding why commodity forward curves slope the way they do.

This note surveys the three major commodity classes — agricultural, metals, and energy — paying particular attention to what makes each class distinct: seasonal weather effects on agricultural prices, the investment/consumption distinction for metals, and the practical nonstorability of electricity. These distinctions drive the pricing analysis in the lessons that follow.

• distinguish investment assets from consumption assets and explain why the distinction changes the forward-pricing equation;
• describe the principal agricultural commodity markets and the role of the stocks-to-use ratio in price volatility;
• explain why gold and silver behave differently from copper as price processes;
• describe the crude oil market structure (Brent, WTI), natural gas seasonality, and why electricity is the extreme case of a non-storable commodity;
• identify the participants in commodity markets — producers, consumers, processors, and speculators — and their natural hedge directions.

1. Investment assets vs consumption assets
2. Agricultural commodities
3. Metals
4. Energy products
5. Market participants