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When trading commodities, liquidity should be the number one factor to consider. This is because the liquidity of a commodity is linked to the ease with which a trader can Buy and Sell the commodity. To put it simply, liquidity is a measure of how many buyers and sellers are present and whether transactions can take place easily.
When there is a significant level of commodity trading activity and where there is both high supply and demand the relevant market would be very liquid. A liquid market is generally associated with less risk, as there is usually someone else willing to take the other side of a position. High liquidity also means less probability of slippage for the trader.
Slippage is defined as the difference between the price quoted to the trader and the actual price at which the trade is executed. Slippage can work both in your favour and against you - for example, trading in commodities with low liquidity could potentially lead to greater losses.
In addition, commodities with low liquidity often face sharp price swings. As such, if you are looking to trade the commodity market, you should try to focus on commodities with high liquidity. Some of these highly liquid commodities include energies such as Oil, Natural Gas, precious metals such as Gold and Silver and agricultural products such as Cotton, Soybeans and Wheat (i.e., commodities with high trading volumes).
One way to manage liquidity risk is through the use of risk management tools like guaranteed stops, a type of stop-loss that ensures your position is closed at your pre-selected price level.
Below is a list of the most actively traded commodities taken from data compiled by the Futures Industry Association (FIA).
West Texas Intermediate (WTI), also known as Texas Light Sweet (ticker: CL), is a grade of crude oil used as a benchmark in oil pricing. It is considered one of the 3 major commodity benchmarks referred to for oil trading, with the other two being Crude Oil and Dubai Crude. This benchmark, in particular, is sourced from the Permian Basin in the USA, and is mainly derived from texas. Like many benchmarks, this one too is substantial for Crude Oil’s buyers and sellers in that its prices are usually referred to when making an oil purchase or buy. This grade is described as Medium crude oil because of its relatively low density, and sweet because of its low sulfur content of around 0.34%. It is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.
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Brent Crude (ticker: EB) is one of the 3 major oil benchmarks and it is considered a grade for ⅔ of the world’s oil contracts. Accordingly, Brent Crude is considered the most used benchmark worldwide. It is extracted from the North Sea and is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.
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Soybeans (ticker: ZS) are one of the most active and popular agriculture commodities. In fact, its production over the world has grown exponentially over the past 20 years as it more than doubled to reach $123 billion in market capitalization. This could be partly due to its multifaceted and multipurposeful nature as it can be used for the production of Soybean Oil, Soybean Meal and other uses. According to the US Department of Agriculture (USDA), the US is the leading producer and exporter of soybeans, mainly exporting them to China, the EU, Japan, Mexico and Taiwan. Soybeans account for 90% of all oilseed production in the US which, in turn, accounted for 44% of the world’s Soybean export in 2010 and 35% of the world’s Soybean production in 2010.
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Natural Gas (ticker: NG) is a non-renewable hydrocarbon that like most fossil fuels, emerges from plants, animals, and microorganisms that lived a long time ago. This fossil fuel is also used as a source of energy for various purposes like industrial, domestic, and power generation uses. Therefore, it’s used for heating, cooking, and electricity generation. It is also used as a fuel for vehicles and as a chemical feedstock in the manufacture of plastics and other commercially important organic chemicals. Most of the world’s Natural Gas is produced in the USA and then Russia, Iran, Qatar, China, and Canada and its largely consumed in the United States, Russia, and China.
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An important food source, Corn (ticker: ZC) is also used in the production of animal feed and ethanol. The major producers of corn around the world are Argentina, Brazil, China and the US. As corn is an agricultural product, its supply can be adversely affected by bad weather. Another factor which can affect the price of corn is the number of farming subsidies provided by government agencies. In the US, the production of corn is heavily subsidised in order to provide a strong incentive for farmers to keep growing this crop. But that’s not all, corn’s production can also be affected by geopolitics. As many countries like China, Egypt, Iran, and Israel import their corn produce from Ukraine, for example, the war between Russia and Ukraine which started in February 2022, largely disrupted the supply chain of corn to these countries. As a result, corn prices as well as other foods skyrocketed.
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Throughout recorded history, Gold (ticker: XAU) has been highly sought after for its beauty as well as a storehouse of value. Gold is mainly mined in Russia, Australia, South Africa, the USA, and Canada. It is also deemed one of the oldest currencies in history. Accordingly, it is considered a safe-haven asset. While the traditional uses of gold have not changed, it nowadays is also regarded as a key component in the manufacture of electronics. Nonetheless, while gold prices are relatively stable, there are many factors like inflation and deflation. Even the Fed’s monetary policy, supply and demand and geopolitics can affect the price of this precious metal.
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Like Gold, Copper (ticker: HG) is widely used in the electronics industry in light of it being a good conductor of electricity. Due to its wide usage in the manufacturing industry, the price of copper can fluctuate according to economic output. The key producers of this metal are Chile, China and Peru.
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Similar to Gold, Silver (ticker: XAG) is highly sought after as a precious metal. However, silver is also widely used in the manufacture of solar panels and photographic films. Although Silver is also regarded as a precious metal, most people prefer gold as it is a more reliable store of value.
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It should be noted that each commodity is different and so their prices are affected by different factors. For example, gold and silver prices can be affected by increased or decreased demand for jewellery and by changes in the demand for a store of value. During economic uncertainty, demand for gold or gold-related investments can increase as a means for investors to protect their wealth. It is therefore critical that you conduct a thorough analysis before deciding to trade commodities.
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This article contains general information which doesn't take into account your personal circumstances.