Commodities: The 10 Most Popular Commodities to Trade
Paul Roberts
16 / March / 22
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The commodities market is popular with many traders, in part because of the high volatility that can occur periodically, allowing traders to profit from both rising and falling prices. Moreover, commodities offer traders and investors the opportunity to diversify their portfolio, which is an important part of risk management.
In this article, we will take a detailed look at the ten most traded commodities in the world, as well as what drives their prices and how you can trade them!
What are commodities (commodities)?
Commodities include raw materials or agricultural products, which, while good in their own right, are usually used as "building blocks" for other goods and services. The term "commodity" thus encompasses many different commodities, from sugar to crude oil, from cotton to steel.
Commodities of the same type and quality are usually interchangeable with each other and therefore have the same value to consumers.
For example, coffee produced in Colombia will have more or less the same value as coffee produced in Kenya, provided it is of the same quality.
Commodities: Top 10 Traded Commodities
In the following sections, we will take a closer look at ten of the most popular commodities to trade in the world, namely:
- Oil Brent Crude Oil
- Oil WTI Crude Oil
- Natural gas
- Gold
- Silver
- Copper
- Coffee
- Sugar
- Cocoa
- Cotton
Oil Brent Crude Oil
The first two places on our list are unlikely to surprise even those who are completely unfamiliar with commodity trading.
Despite the move towards cleaner energy in recent years, crude oil is still in high demand. Thanks to it, we can drive cars, heat our homes, and produce fertilizers, pesticides, and plastics.
Brent Crude is one of the two main types of crude oil that are world standards in this industry, the second type is WTI oil. Brent Crude is produced in the North Sea and is classified as a light sweet oil. It is considered light due to its low density and low sulfur due to its low sulfur content. These qualities make Brent Crude oil relatively easy to clean.
What affects the price of this commodity?
Like all commodities, the price of Brent Crude oil depends on factors that determine global supply and demand. However, it is well known that crude oil is particularly sensitive to geopolitical events.
To discuss in detail everything that affects the price of crude oil would require a separate article, so here we will just look at one of the main factors that affect both supply and demand.
The world demand for oil and, consequently, its price correlate with the state of the economy. In times of economic boom, the demand for oil increases to meet the growing production and transportation volumes, which leads to higher prices. Conversely, during an economic downturn, the demand for oil and, as a result, its price decline.
The world's supply of crude oil is largely dependent on the Organization of the Petroleum Exporting Countries (OPEC), which regularly sets production quotas for its member countries to put pressure on world oil prices when necessary.
Oil WTI Crude Oil
The second position on our list of the most traded commodities is another type of crude oil. West Texas Intermediate (WTI) oil is also a benchmark in the oil industry. It is produced in various US states and is also classified as a light and sweet oil, with a sulfur content and WTI density even lower than Brent Crude.
What affects the price of this commodity?
The factors that affect the price of WTI are essentially the same as the factors that affect Brent oil. Historically, WTI oil prices have been highly dependent on the level of demand in the US. This is because Cushing, Oklahoma, where crude oil is transported after drilling, is landlocked, making international exports difficult.
However, the Seaway Pipeline, which runs between Cushing and Texas and was previously used to transport oil from Texas to Cushing, has been reversed, pumping oil to Texas from Cushing. This made it easier to export WTI and helped close the gap between WTI and Brent Crude as their prices became more closely correlated than before.
Natural gas
Natural gas is an important source of energy around the world, which lies deep underground. Although natural gas is a non-renewable energy source, it is by far the most environmentally friendly fossil fuel. In addition, it is very versatile and is used for the same purposes (almost all) as crude oil.
According to the International Energy Agency (IEA), by 2040 the demand for natural gas will grow by 30%, which underlines the global importance of this fuel.
What affects the price of this commodity?
As with crude oil, demand for natural gas tends to rise during good economic times, driving up prices. In unfavorable periods of economic development, the opposite is true.
Other factors that affect the price include: seasonality - due to increased winter heating demand - technological advances that can improve gas production, and natural disasters that can threaten supply.
Gold
The precious metal, which has been hunted for centuries, is now used mainly for jewelry production and also as an investment opportunity. Gold is mined mainly in China, Australia, Russia and the USA.
This asset is considered to be a so-called “safe haven” because usually gold not only does not depreciate, but can even rise in price during times of economic and political turmoil.
Therefore, in times of uncertainty, investors move away from other investments, preferring to invest their money in safe assets such as gold.
What affects the price of this commodity?
Thanks to its reputation as a safe haven, demand for gold tends to rise during times of economic uncertainty, which in turn can drive up its price. In addition, gold can be used to protect against inflation or currency devaluation, since the price of gold has an inverse relationship with the US dollar: when the dollar falls, gold rises in price.
Silver
Another precious metal, silver, has also always been popular with the world's population. Unlike gold, about half of the demand for silver comes from industrial uses such as solar panels and electrical engineering.
However, like gold, much of the demand for silver comes from jewelers and its use as an investment asset. While silver has also been described as a safe haven for investment, it is not considered as safe as gold because gold's value is less dependent on the state of the industry.
What affects the price of this commodity?
As already noted, silver is a safe haven asset, so its price often rises during economic turmoil. Silver is most often mined from ores of other metals, which means that changes in the prices of such metals will also affect the price of silver.
Copper
Copper is a very important metal in the modern world. Being an excellent conductor of electricity and heat, it is widely used in the electronics and construction industries. Chile is a major copper producer, accounting for 28% of total global copper production in 2019. Peru, China and the US are also major, although smaller, copper producers.
What affects the price of this commodity?
Due to the fact that copper is used in production, the price of copper is highly dependent on production volumes, so demand for the base metal is seen as a reliable indicator of economic health.
Emerging markets account for a significant portion of the copper market due to the growing demand for new housing, transportation infrastructure and electronics. A slowdown in emerging markets could have a very negative impact on copper prices and vice versa.
Coffee
Researchers estimate that there are 2.25 billion cups of coffee a day around the world, so it's no wonder it's on our list of the world's most traded commodities. Coffee is grown in more than 50 countries, in the so-called "coffee belt", and Brazil is the largest producer.
There are two main varieties of coffee that account for the vast majority of its production: Arabica and Robusta. Arabica is considered to be of higher quality, which makes this variety more popular. It accounts for about 60% of total coffee consumption.
In terms of trading, Arabica prices tend to be more stable, while Robusta prices tend to be more volatile.
What affects the price of this commodity?
The prices of agricultural commodities, also known as soft commodities, can be highly dependent on weather conditions. Unfavorable conditions will hamper production, reducing the world's supply and thus raising the price. Of course, the opposite is also true.
Soft commodities are also at risk of plant diseases, which naturally affect yields. For example, in 2012, a disease known as "coffee rust" struck various coffee-producing countries in Latin America and the Caribbean. The resulting crop loss led to a sharp drop in supply and an increase in the price of coffee.
More than 65% of coffee is produced in just five countries, and therefore, if political or social upheavals occur in one of these countries, this can seriously affect the world's supply.
Coffee markets usually react very quickly to any adverse developments in producing countries.
Despite the high level of global consumption, coffee is not a commodity. This means that the global demand for coffee can go up and down in line with the health of the economy.
Sugar
Once considered a luxury only available to the rich, and referred to as "white gold" by those who first traded it, sugar has long been a highly sought after commodity. Its use in food and beverages around the world, as well as other lesser-known uses such as medical equipment and beauty products, make sugar one of the most widely traded commodities on the market.
What affects the price of this commodity?
While sugar has become much more accessible to the public these days, it is still considered a luxury item to some extent, meaning that, as with other commodities on this list, the demand, and hence the price, for sugar, as a rule, correlate with economic indicators (positive and negative).
In most developed countries, there are well-known health problems caused by excessive consumption of sugar, which, in the future, can lead to a decrease in demand and prices of this product. In the UK, for example, a "sugar tax" was introduced in 2008 on soft drinks containing a certain amount of sugar.
Cocoa
Cocoa is used to make one of the world's most beloved products, chocolate. It is believed that the Maya began to grow this commodity over 5,000 years ago, and today the annual consumption of cocoa is estimated at about 4.5 million tons!
Cocoa production is concentrated in West Africa and Latin America, with West Africa accounting for 65% of global production. The vast majority of commodities are traded in US dollars, but cocoa is one of the last commodities that is still typically traded in British pounds.
What affects the price of this commodity?
As with other soft commodities, weather plays an important role in the world's cocoa supply. Moreover, cocoa crops can die from various plant diseases, which adversely affects production. For example, in 2010, half a million tons of cocoa were destroyed due to black pod disease, which is more than 11% of the total demand according to earlier estimates of annual consumption!
The vast majority of cocoa production is in West Africa, and unfortunately, producing countries often suffer from political uncertainty, corruption or social unrest. These factors can disrupt production chains or supply chains, causing high price volatility.
Cotton
Most of the people reading this article are most likely wearing at least one piece of clothing right now, made from the last item on our list!
But, in addition to clothing and household items, cotton seeds are also used as livestock feed, from which oil is obtained, which is subsequently used in the production of soap, margarine, rubber and plastics. The cotton fiber found in cotton seeds is also used to make bandages and banknotes.
India, China and the US are the three largest cotton producers in the world.
What affects the price of this commodity?
Like any other agricultural commodity, cotton production is affected by weather conditions.
In recent years, China has been hoarding cotton to ensure that it has enough stocks of the commodity. This led to higher cotton prices in China. If China puts its stocks on the market, it will have a negative impact on the world price due to the oversupply. On the other hand, if he continues to stockpile cotton, it could lead to global shortages and higher prices.
The US, like other governments, heavily subsidizes its cotton industry. This allows them to maintain a high level of cotton supply and low prices.
Recently, there have been numerous allegations that China produces cotton using forced labor. In this regard, various consumers boycotted cotton produced in China. Subsequently, this may develop into the imposition of sanctions against China by countries. Since China accounts for a significant portion of the global supply, this could lead to higher prices in the future.
Trading commodities: how to start trading commodities?
Goods are tangible assets that can be bought or sold. Of course, buying these products in large quantities creates logistical challenges for traders looking to make a profit.
However, traders can use financial instruments to speculate on commodity prices without physically owning the asset. The following are some of the most common ways to trade commodities:
- Contracts for difference (CFDs)
- Promotions
- Exchange-traded funds (ETFs)
- Futures
- Options
- Spread betting
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Paul Roberts
Paul Roberts 51 years old Born in Edinburgh. Married. Studied at University of Oxford, Department of Public Policy and Social Work. Graduated in 1997. Works at Standard Life Aberdeen plc.
