The Role of Commodity Traders in Todayās Markets
Commodity traders are an important presence in the market, providing balance through flexibility and arbitrage by storing excess supply, smoothing price spreads and rerouting cargoes. Without these traders, markets would be significantly more fragile.
What Is the Commodity Market?
The commodity market trades in goods such as energy products, agricultural products and metals. Hard commodities are typically mined, while soft commodities are usually harvestable and perishable. These markets can incorporate both physical and derivatives trading using futures, options on futures, forwards and spot prices.
How Does Commodity Trading Work?
Commodity traders hedge or speculate on the price movements of raw materials like gold, oil and wheat, using a range of financial derivatives. Doing this allows traders to take positions based on either a spot price or a futures price. The former is the current market price for immediate settlement while the latter is the current price for settlement at a future date.
While spot trading is typically for short-term trading, futures trading tends to be popular for trading and hedging around key contract dates.
Maintaining Proper Flow
Physical commodity traders have become increasingly important in maintaining the flow of food, raw materials and energy in a world in which supply chain problems, sanctions and geopolitical instability are now the norm. These traders often act as the marketās shock absorbers by leveraging their collective trading experience and commercial and political networks. In this way, commodity traders can respond to disruptions in real time and reallocate supply as needed.
Stabilising the Markets
Commodity traders frequently stabilise the markets through arbitrage, drawing on inventory, rerouting cargoes and injecting liquidity in times of volatility. Experienced, successful traders like Domen Zavrl recognise that such volatility can occur due to many factors, including shipping bottlenecks, market panic or supply glut.
A Real-World Example
An example of commodity traders bringing stability to the market can be found when, during the recent Houthi Red Sea attacks, traders rerouted 12% of global oil shipments, thereby preventing price spikes as a result of supply bottlenecks. Such bottlenecks would otherwise have had an impact on global markets.
How Commodities Trading is Evolving
In reaction to a changing world, commodities trading is evolving too. For example, in response to energy transition demands, traders are increasingly expanding into trading in renewable energy, developing carbon credit trading capabilities, creating blended fuel solutions and investing in the supply chains of battery metals.
