How Commodities Trade
Commodities trade mostly as futures with delivery dates, which introduces a cost of carry that equities simply do not have.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- Most commodity exposure is futures, not the physical good.
- Futures expire, so a continuous position must be rolled from one contract to the next.
- Contango makes rolling cost money; backwardation makes it earn money.
- That roll is why a commodity fund's return can differ substantially from the spot price's.
- The futures curve is itself information about physical supply and demand.
MAD Academy Training Video · 0:46
You Are Trading a Delivery Date
Commodity exposure almost never means the physical good. It means a contract with an expiry, and the expiry is where the surprises live.
This lesson is part of a Stock Alerts + Tools plan.
Futures, not barrels
A futures contract is an agreement to transact a standardised quantity at a set price on a set date. It exists so producers and consumers can lock in prices ahead of time, and financial participants provide much of the liquidity that makes that possible.
Because contracts expire, maintaining exposure means selling the expiring contract and buying a later one. That transaction is the roll, and it happens whether or not the spot price moved at all. Nobody chose to trade; the calendar forced it.
This is the single largest difference between owning a commodity fund and owning a stock. A share has no expiry and no roll; a commodity position has both, and the roll is a recurring economic event.
Contango and backwardation
| Shape | Meaning | Effect on a long roll |
|---|---|---|
| Contango | Later contracts cost more than nearer ones | Selling cheap and buying dear: a persistent drag |
| Backwardation | Later contracts cost less than nearer ones | Selling dear and buying cheap: a persistent tailwind |
Contango is the ordinary state for storable commodities, because holding physical barrels or bushels costs money in storage, insurance and financing. Somebody has to be compensated for warehousing the stuff between now and the delivery date.
Backwardation typically signals that immediate physical supply is tight enough that buyers will pay a premium to have it now rather than later. It is one of the few genuinely forward-looking signals in commodity markets, because it reflects the decisions of people who actually need the physical good.
This is why a commodity fund can lose value over a year in which the spot price finished flat. Nothing is broken; the roll cost is a real economic cost of holding exposure through time, and it is disclosed in the fund's documents.
Scroll the chart sideways to see all of it.
- Contango
- Backwardation
The main groups
- Energy: crude oil, refined products, natural gas. The most macro-sensitive group and the largest by traded value.
- Precious metals: gold and silver, driven by real rates and the dollar index more than by industrial demand.
- Industrial metals: copper and aluminium, read widely as a proxy for global manufacturing activity.
- Agriculture: grains and softs, dominated by weather and by planting cycles rather than by macro.
The groups behave differently enough that treating commodities as one asset class is usually a mistake. Gold and copper can move in opposite directions for months at a time, because one is responding to real interest rates and the other to industrial demand.
The contract specification
A futures contract is a standardised agreement, and the standardisation is what makes it tradeable. Every term other than the price is fixed by the exchange, which is why two contracts for the same commodity in the same month are interchangeable.
| Term | What it fixes | Example |
|---|---|---|
| Contract size | The quantity per contract | 1,000 barrels of crude oil |
| Delivery month | When the contract settles | Monthly for energy, quarterly for many financials |
| Delivery point | Where physical delivery occurs | Cushing, Oklahoma for WTI |
| Grade | The exact quality accepted | A specified sulphur content and density |
| Tick size | The minimum price increment | One cent per barrel |
| Settlement | Physical delivery, or cash | Physical for crude, cash for most index futures |
The delivery point matters more than it appears. WTI is priced at an inland location with finite pipeline and storage capacity, which is why its price can dislocate from a seaborne benchmark when that capacity binds. The 2020 negative print was a delivery-point constraint expressed as a price.
Physical settlement is a genuine obligation. A holder of an expiring contract who does not close or roll it is contracted to take delivery, which is why exchange-traded products tracking commodities roll their exposure forward and why the roll produces the drag that separates them from spot.
The main groups, and what moves each
Commodities are conventionally grouped into families that share a driver, and the groups behave differently enough that treating them as one asset class conceals most of what is going on.
| Group | Members | Principal driver |
|---|---|---|
| Energy | Crude, natural gas, refined products | Supply decisions and global growth |
| Precious metals | Gold, silver, platinum | Real rates, the dollar, and demand for a store of value |
| Industrial metals | Copper, aluminium, nickel | Construction and manufacturing demand |
| Agriculture | Grains, softs, livestock | Weather, plantings and export policy |
Precious metals sit apart from the rest. Gold has minimal industrial demand relative to its supply and does not produce a cash flow, so its price responds to the real interest rate: holding it costs whatever could have been earned elsewhere, and that cost falls when real rates fall.
Copper is the group member most often cited as an economic indicator, on the reasoning that it is used in nearly everything built. The relationship is real and noisy, and it has weakened as supply disruptions and inventory cycles have become larger drivers of its price.