A trader can call the direction of crude oil correctly and still lose money on a long futures position. The shape of the futures curve, not the spot forecast, decides that outcome.
A commodity is a physical good drawn from a natural resource, tradable and supplied without meaningful differentiation. Broad benchmarks such as the Bloomberg Commodity Index split the asset class into six sectors: energy, grains, industrial (base) metals, livestock, precious metals, and softs (cash crops). What separates them is how cheaply the good can be produced and stored, how fast it spoils, how seasonal its output is, and whether demand tracks gross domestic product (GDP) growth or the weather.
Fundamental analysis of any sector runs on four tools: direct announcements from agencies such as the US Department of Agriculture (USDA) or the International Energy Agency (IEA); component analysis that separates the stock (potential capacity, arable land, herd size) from the flow (actual utilization, tanker traffic, yields per acre); timing considerations such as seasonality and logistics shocks; and money flow, meaning sentiment, interest rates, and...
Common mistakes
- Reading roll return as cash. It is the accounting difference between the contract sold and the contract bought, not a distribution. Candidates add it twice by also adjusting the price return.
- Flipping the roll sign. Computing far minus near turns Example 1's −1.47% into +1.47%. Near minus far, divided by near, is the only correct order.
- Assuming contango means a loss. A +8.00% price return with −6.00% roll return still nets positive. Contango is a drag, not a verdict.
Bottom line
- Six sectors: energy, grains, industrial metals, livestock, precious metals, softs; storability, spoilage, and seasonality separate them
- Life cycle: metals and energy extract continuously, grains and livestock and softs follow biological calendars that shape seasonal curves
- Valuation: commodities have no cash flows, so value comes from forecast supply, demand, and volatility, not discounted cash flow
- Participants: hedgers, informed investors, liquidity providers, arbitrageurs, exchanges, analysts, and regulators such as the CFTC
Exam shortcut
Write the three-part decomposition before you read the answer choices: price, roll, collateral. Vignettes almost always give you two of the three and ask for the missing one, so solve by subtraction. When you see two contract prices, order them near minus far over near; if the answer set contains the same number with both signs, that pair is the trap.
The full lesson (about 2,576 words, 17 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- commodities
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