GET Financial Education Series - Futures
Commodity Futures – Lesson 3
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Have you ever had a moment like James did in our story when you stop and wonder what markets affect the food you eat, the clothes you buy and the fuel that you put in your car? Have you ever wondered how you could profit from these markets?
You are surrounded by goods and products which are made from commodities that are traded on Futures exchanges. The prices of the raw materials used to make the shirt on your back, the furniture in your house and the food on your table were most likely influenced by Futures traders, and you can take advantage of those price fluctuations. However, you need to understand what you are trading before you can consistently make money in this market.
Profitable Futures traders recognize that each Futures contract has its own personality based on the underlying commodity on which it trades. You have learned the basics of what the Futures market is and how it works. Now it is time to learn the individual characteristics of those Futures contracts that you are going to be trading.
In this section we will be discussing those Futures contracts we have classified as commodity Futures - those Futures contracts that are based on a physical commodity that you can grow/raise/mine and transport from place to place. We will discuss the following commodities:
- Crude oil
- Natural gas
- Gold
- Silver
- Soya beans
- Wheat
- Corn
- Coffee
- Sugar
- Cotton
This is not a comprehensive list of the commodity Futures offered at GET Financial but it should be enough to get you started as a Futures trader
Supply and Demand
Before we dive into an in-depth look at some of the commodity Futures, however, we are going to take a moment and review the basic economic principles of supply and demand. The principles of supply and demand permeate the Futures market. If you hope to be a successful Futures trader then you must understand these basic concepts.
Figure 1 is a typical supply and demand chart. Demand is represented by the line that is sloping downward from left to right whilst supply is represented by the line that is sloping upward from left to right. The point at which these two lines cross represents the price the market will accept for the Futures contract.
Figure 1 - Supply and Demand Chart
Now watch what happens as supply and demand increase and decrease.
Increasing demand for a Futures contract increases the value of that Futures contract (see Figure 2).
Figure 2 - Supply and Demand Chart (Increased Demand)
Increasing supply of a Futures contract decreases the value of that Futures contract (see Figure 3).
Figure 3 - Supply and Demand Chart (Increased Supply)
Decreasing demand for a Futures contract decreases the value of that Futures contract (see Figure 4).
Figure 4 - Supply and Demand Chart (Decreased Demand)
Decreasing supply of a Futures contract increases the value of that Futures contract (see Figure 5).
Figure 5 - Supply and Demand Chart (Decreased Supply)
Hopefully you feel comfortable with the basics of supply and demand. You will often refer to these concepts in your Futures trading. Now let's take a closer look at some of the commodity Futures you may be trading.
Crude Oil (CL)
Crude oil contracts are part of the energy sector and trade on the New York Mercantile Exchange (NYMEX). These contracts each represent 1,000 barrels of oil and are quoted in U.S. dollars per barrel ($/barrel). Prices for crude oil contracts move in $0.01 increments with no limit on how far the price of each contract can move during a single trading day.
Crude oil contracts trade for the following expiration months:
| F |
January |
| G |
February |
| H |
March |
| J |
April |
| K |
May |
| M |
June |
| N |
July |
| Q |
August |
| U |
September |
| V |
October |
| X |
November |
| Z |
December |
Crude oil contracts expire (stop trading) on the third business day prior to the 25th calendar day of the month preceding the delivery month. Crude oil contracts are settled by physical delivery of the commodity. Mini Crude Oil contracts, which only represent 500 barrels of oil, are cash settled.
Crude oil contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| More people driving cars |
Increased Demand |
Summer |
| People heating their homes |
Increased Demand |
Winter |
| Attacks on oil pipelines |
Decreased Supply |
Unknown |
| Increasing population |
Increased Demand |
Continuous |
| OPEC production increases |
Increased Supply |
Unknown |
| OPEC production decreases |
Decreased Supply |
Unknown |
| Conflicts in Middle East |
Decreased Supply |
Unknown |
| Economic growth |
Increased Demand |
Unknown |
| Hurricane season |
Decreased Supply (U.S.) |
June to November |
Natural Gas (NG)
Natural gas contracts are part of the energy sector and trade on the New York Mercantile Exchange (NYMEX). These contracts represent 10,000,000,000 British thermal units (10,000 million BTU) and are quoted in cents per British thermal unit (Cents/BTU). Prices for natural gas contracts move in $0.001 increments with no limit on how far the price of each contract can move during a single trading day.
Natural gas contracts trade for the following expiration months:
| F |
January |
| G |
February |
| H |
March |
| J |
April |
| K |
May |
| M |
June |
| N |
July |
| Q |
August |
| U |
September |
| V |
October |
| X |
November |
| Z |
December |
Natural gas contracts expire (stop trading) three business days prior to the first calendar day of the delivery month. Natural gas contracts are settled by physical delivery of the commodity.
Natural gas contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| People heating their homes |
Increased Demand |
Winter |
| People cooling their homes |
Increased Demand |
Summer |
| Increasing population |
Increased Demand |
Continuous |
| Decreasing natural gas supplies |
Decreased Supply |
Continuous |
| Hurricane season |
Decreased Supply (U.S) |
June to November |
GOLD (GC)
Gold contracts are part of the precious metals sector and trade on the Chicago Board of Trade (CBOT). These contracts represent 100 troy ounces of gold and are quoted in U.S. dollars per ounce ($/ounce). Prices for gold contracts move in $0.10 increments with no limit on how far the price of each contract can move during a single trading day.
Gold contracts trade for the following expiration months (months in [brackets] indicate contracts that typically have lower volume):
| G |
February |
| J |
April |
| M |
June |
| N |
[July] |
| Q |
August |
| V |
October |
| Z |
December |
Gold contracts expire (stop trading) on the third to last business day of the expiration month. Gold contracts are settled by physical delivery of the commodity.
Gold contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Christmas jewellery |
Increased Demand |
Before Christmas |
| Fears of inflation |
Increased Demand |
Unknown |
| Weakening U.S. dollar |
Increased Demand |
Unknown |
| Mining troubles in South Africa |
Decreased Supply |
Unknown |
| Growing middle class |
Increased Demand |
Continuous |
| Decreasing gold supplies |
Decreased Supply |
Unknown |
| Weakening equity markets |
Increased Demand |
Unknown |
| Increased exploration/mining |
Increased Supply |
As gold prices rise |
| Decreased exploration/mining |
Decreased Supply |
As gold prices fall |
| Wedding season in India |
Increased Demand |
November to May |
Silver (SI)
Silver contracts are part of the precious metals sector and trade on the Chicago Board of Trade (CBOT). These contracts represent 5,000 troy ounces of silver and are quoted in U.S. dollars per ounce ($/ounce). Prices for gold contracts move in $0.05 increments with no limit on how far the price of each contract can move during a single trading day.
Silver contracts trade for the following expiration months (months in [brackets] indicate contracts that typically have lower volume):
| F |
[January) |
| H |
March |
| K |
May |
| M |
[June] |
| N |
July |
| Q |
[August] |
| U |
September |
| Z |
December |
Silver contracts expire (stop trading) on the third to last business day of the expiration month. Silver contracts are settled by physical delivery of the commodity.
Silver contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Christmas jewellery |
Increased Demand |
Before Christmas |
| Christmas photography |
Increased Demand |
Before Christmas |
| Fears of inflation |
Increased Demand |
Unknown |
| Weakening U.S. dollar |
Increased Demand |
Unknown |
| Decreasing silver supplies |
Decreased Supply |
Unknown |
| Growing middle class |
Increased Demand |
Continuous |
Soya Beans (S)
Soya bean contracts are part of the agriculture sector and trade on the Chicago Board of Trade (CBOT). These contracts represent 5,000 bushels of soya beans and are quoted in cents per bushel (Cents/bushel). Prices for soya bean contracts move in 1/4 cent increments and have a limit on how far the price of each contract can move during a single day.
Soya bean contracts trade for the following expiration months:
| F |
January |
| H |
March |
| K |
May |
| N |
July |
| Q |
August |
| U |
September |
| Z |
December |
Soya bean contracts expire (stop trading) on the business day prior to the 15th calendar day of the contract month. Soya bean contracts are settled by physical delivery of the commodity.
Soya bean contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Decreased acreage allocation |
Decreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
Wheat (W)
Wheat contracts are part of the agriculture sector and trade on the Chicago Board of Trade (CBOT). These contracts represent 5,000 bushels of wheat and are quoted in cents per bushel (Cents/bushel). Prices for wheat bean contracts move in 1/4 cent increments and have a limit on how far the price of each contract can move during a single day.
Wheat contracts trade for the following expiration months:
| H |
March |
| K |
May |
| N |
July |
| U |
September |
| Z |
December |
Wheat contracts expire (stop trading) on the business day prior to the 15th calendar day of the contract month. Wheat contracts are settled by physical delivery of the commodity.
Wheat contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Decreased acreage allocation |
Decreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
Corn (C)
Corn contracts are part of the agriculture sector and trade on the Chicago Board of Trade (CBOT). These contracts represent 5,000 bushels of corn and are quoted in cents per bushel (Cents/bushel). Prices for corn contracts move in 1/4 cent increments and have a limit on how far the price of each contract can move during a single day.
Corn contracts trade for the following expiration months:
| H |
March |
| K |
May |
| N |
July |
| U |
September |
| Z |
December |
Corn contracts expire (stop trading) on the business day prior to the 15th calendar day of the contract month. Corn contracts are settled by physical delivery of the commodity.
Corn contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Increased ethanol use |
Increased Demand |
Ongoing |
| Decreased acreage allocation |
Decreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
Coffee (KC)
Coffee contracts are part of the so-called 'softs' sector and trade on the New York Board of Trade (NYBOT). These contracts represent 37,500 pounds of coffee and are quoted in cents per pound (Cents/pound). Prices for coffee contracts move in $0.05 increments with no limit on how far the price of each contract can move during a single day.
Coffee contracts trade for the following expiration months:
| H |
March |
| K |
May |
| N |
July |
| U |
September |
| Z |
December |
Coffee contracts expire (stop trading) one business day prior to the last notice day - which is seven business days prior to the last business day of the delivery month. Coffee contracts are settled by physical delivery of the commodity.
Coffee contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Cold weather |
Increased Demand |
Summer of southern hemisphere |
| Warm weather |
Decreased Demand |
Winter of southern hemisphere |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Freezing temperatures in fields |
Decreased Supply |
June to September (Winter of southern hemisphere) |
| Decreased acreage allocation |
Descreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
Sugar (SB)
Sugar contracts are part of the softs sector and trade on the New York Board of Trade (NYBOT). These contracts represent 112,000 pounds of sugar and are quoted in cents per pound (Cents/pound). Prices for sugar contracts move in $0.01 increments with no limit on how far the price of each contract can move during a single day.
Sugar contracts trade for the following expiration months:
| F |
January |
| H |
March |
| K |
May |
| N |
July |
| V |
October |
Sugar contracts expire (stop trading) on the last business day of the month preceding the delivery month. Sugar contracts are settled by physical delivery of the commodity.
Sugar contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Holiday cooking |
Increased Demand |
Before Christmas |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Decreased acreage allocation |
Descreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
| Increased ethanol use |
Increased Demand |
Ongoing |
Futures Contracts
Cotton contracts are part of the softs sector and trade on the New York Board of Trade (NYBOT). These contracts represent 50,000 pounds of cotton each and are quoted in cents per pound (Cents/pound). Prices for cotton contracts move in $0.01 increments with a limit on how far the price of each contract can move during a single day.
Cotton contracts trade for the following expiration months:
| H |
March |
| K |
May |
| N |
July |
| V |
October |
| Z |
December |
Cotton contracts expire (stop trading) 17 business days from the end of the spot month. Cotton contracts are settled by physical delivery of the commodity.
Cotton contracts are affected by supply and demand, and the following table lists various factors that affect those levels of supply and demand.
| FACTOR |
RESULT |
TIME OF YEAR |
| Planting, pollination, harvest |
Increased Supply |
See the Global Crop Calendar in the right-hand column of this page |
| Increasing population |
Increased Demand |
Continuous |
| Drought |
Decreased Supply |
Unknown |
| Decreased acreage allocation |
Descreased Supply |
Unknown |
| Increased acreage allocation |
Increased Supply |
Unknown |
Crude Oil (CL)
