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Overview: trading raw materials
Commodity futures are traded in contracts. Each product has a standard size determined by the futures exchange on which it is traded.
Take gold as an example. The contract size for gold futures is 100 troy ounces. So if you buy a gold contract, your open position is worth 100 troy ounces of gold. If the price of gold goes up $ 1 per troy ounce, the value of your gold goes up by $ 100 ($ 1 x 100 troy ounces).
You need to check the contract size of the commodity you are trading as there are different standard contract sizes. We also offer mini-contracts to complement the standard sizes available.
Since they are leveraged products, you do not have to put up the full value of your position when buying commodity contracts. Instead, each commodity has a fixed margin per contract.
Contango and backwardation
Contango and backwardation are terms used to describe the shape of the future price for a certain commodity over the coming months. The price curve of the futures shows the price of a futures contract according to the term.
Contango occurs when the future price is higher than the current spot price and the forward curve is moving upwards. As you near the end date of the contract, the gap between the spot price and the future price narrows. The curve would therefore approach the spot price.
Backwardation occurs when the forward price is lower than the current spot price and the forward curve is therefore moving downwards. As you near the end date of the contract, the gap between the spot price and the future price narrows, so that the curve approaches the spot price from below.
Under normal market conditions, you would expect commodity futures to trade with contango. This is because the forward price includes the fees for holding the position, so theoretically it will get higher and higher over time. For some commodities, however, geopolitical factors play a much larger role and decide whether to contango or backwardation.
The futures curve is important to both people buying commodities as a hedge and speculators as it gives an idea of how the commodity is trading in the market now and in the months ahead. Backwardation can, for example, indicate a limited supply that drives the current price up or an expected oversupply in the coming months, which causes the future price to fall.
For example, when contango is traded in the crude oil markets, it means that there is sufficient supply. Backwardation can also indicate an imminent bottleneck. Events that threaten the global oil supply, such as war, often lead to backwardation in the market.
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