Commodities Spread Betting Guide

Commodities Trading
Commodities trading… easier said than done


Live Commodities Spread Betting Chart and Prices

The chart below defaults to gold, you can it for other markets, e.g. search for silver, cocoa, coffee, cotton, natural gas, sugar, soybean and wheat.

For US crude oil, search for ‘oil’, for Brent crude oil, search for ‘Brent oil’.


Commodities Markets Guide Prices:



Where Can I Spread Bet on Commodities

All of the FCA regulated spread betting companies will offer live prices on the main commodity markets, i.e. gold, siver, US crude and Brent crude.

See the table below for an commodities comparison.


Commodities Spread Betting Comparison

navigate_beforeComparison Scroll navigate_next
Company Commodities
Min Stake
Gold
Spread
Silver
Spread
US Crude
Spread
UK Crude
Spread
Crude Diff.
Spread
Apply
Financial Spreads Review £0.50 4 3 3 3 3 Apply

Review
City Index Review £0 4 (+) 2.5 (+) 5 (+) 5 (+) n/a Apply

Review
ETX Capital Review &pound:0.50 6 3 6 6 Apply

Review
IG Review £1-5 3 3 3 3 no Apply

Review


Introduction to Commodities Spread Betting

A commodity is, essentially, a product whose market value fluctuates on a daily basis due to supply and demand. It is usual for such commodities to be traded without differentiation of source or, in some cases, quality.

Commodities are typically split into three categories:
  • Metals: for example Gold, Silver, Platinum & Copper
  • Energies: for example UK Crude Oil (also known as Brent Crude Oil), US Crude Oil (also known as Nymex and WTI), Natural Gas & Heating Oil
  • Softs: for example Coffee, Cocoa, Sugar, Live Cattle, Soybean, Soybean Oil, Wheat & Lean Hogs
When it comes to financial spread betting, the most traded commodities are crude oil and gold.

Commodities trading is a particularly interesting form of investing because of the unique way in which prices are directly affected by supply and demand. The price of a commodity can be influenced by various factors including:
  • Poor weather naturally affects the supply and therefore affects the price of crops such as Coffee, Wheat and Sugar
  • The hurricane season in America can increase the price of Oil by limiting extraction and refining rates, therefore reducing supply
  • In 2008, severe power shortages in South Africa threatened to decrease Gold extraction rates which led to an increase in the price of the yellow metal
  • In 2010, the Enbridge Energy pipeline, which supplies Canadian Oil to America’s Mid-West, closed for 8 days. The reduction in supply saw a temporary spike in Oil prices
These reasons make financial spread betting a useful tool when speculating on the commodities markets.

Note that foreign exchange rates can also have a big impact on the commodities markets. With financial spread betting, you can often trade in the currency of your choice. That said, it should be noted that commodities are generally priced in US Dollars.

Therefore, even if you are trading in Sterling, you can often see large commodities price movements due to fluctuations in the GBP/USD exchange rate

Whilst there are the tax free* benefits of financial spread betting on commodities there are of course drawbacks to trading these markets. Because financial spread betting is leveraged, an investor could lose more than their initial stake.

Nevertheless, the use of a Stop Loss order, combined with only risking money that you can afford to lose, can help to limit the potential downsides. Be aware though that not all Stop Loss orders are guaranteed.


How to Spread Bet on Commodities

As an example, let’s suppose that you want to speculate on gold, you go on a spread betting website, e.g. City Index, and see the market price of:

Gold Rolling Daily: $1,742.7 – $1,743.1

Here’s an example of how it works.

The Spread Betting Market Gold Rolling Daily
Spread $1,742.7 – $1,743.1
How the Market Works Now you can spread bet on the gold Rolling Daily market moving:

  arrow_upward  Higher than $1,743.1, or
  arrow_downward  Lower than $1,742.7

This is a Rolling Daily spread bet which means that there is no expiry date for this trade. If you don’t close your position and the session ends then your trade will automatically roll over to the next trading session.

If a trade rolls over then you will either receive or be charged a small fee for overnight financing depending upon whether you are betting on the market to increase or decrease.

For more details see our guide to daily spread bets.
Units Traded Spread bets on the gold market are made in £x per $0.1.

Where $0.1 is 10¢ of the metal’s price movement.

E.g. if gold changes by $3.50 then you would lose or gain 35 multiples of your stake.
Stake per Unit You choose how much you are going to trade per $0.1, e.g. £1 per $0.1, £5 per $0.1, £10 per $0.1 etc.
Brief Staking Example For example, if your stake is £5 per $0.1 and gold moves by $2.00, you would lose or win £5 per $0.1 x $2.00 = £100.


Worked Trading Example | Going Long of Gold

Spread betting on the metal to increase in value

You Now Work Out Whether to Go Long or Short Gold to go:

  arrow_upward  Higher than $1,743.1? or
  arrow_downward  Lower than $1,742.7?

Let’s Assume You Buy   arrow_downward  Higher than $1,743.1
You Select How Much to Risk, Let’s Say You Opt For £2 per $0.1
So Now What?
  • You make a gain of £2 for every $0.1 gold climbs higher than $1,743.1
  • You lose £2 for each $0.1 gold drops lower than $1,743.1
If You Are Spread Betting on a Market to Increase Your Profits/Losses = (Closing Price – Opening Price) x stake per $0.1
 
Trading Example 1 Gold moves higher and the spread trading market becomes $1,749.6 – $1,750.0.
Time to Lock in a Profit? You may choose to keep your gold bet open or close it, i.e. close your trade to lock in your profit. In this example you opt to close your bet and sell at $1,749.6.
Your Profits/Losses = (Closing Price – Opening Price) x stake per $0.1
($1,749.6 – $1,743.1) x £2 per $0.1
$6.5 x £2 per $0.1
Your Profits/Losses = £130 profit
 
Trading Example 2 Gold slips and the financial spread betting market is revised to $1,737.4 – $1,737.8.
Close and Restrict the Loss? At this point, you can choose to let your spread bet run or close it to restrict your loss. In this example you decide to close your trade and sell the market at $1,737.4.
Your Profits/Losses = (Closing Price – Opening Price) x stake per $0.1
($1,737.4 – $1,743.1) x £2 per $0.1
-$5.7 x £2 per $0.1
Your Profits/Losses = -£114 loss


Worked Example | Taking a Short Position on Gold

Financial spread betting on the metal to go down

You Now Decide Whether to Go Long or Short Gold to move:

  arrow_upward  Higher than $1,743.1? or
  arrow_downward  Lower than $1,742.7?

You Might Decide to Go Short  arrow_downward  Lower than $1,742.7
You Decide Your Stake, Let’s Say You Choose £1 per $0.1
So What Happens Now?
  • You lose £1 for each $0.1 Gold moves higher than $1,742.7
  • You make a profit of £1 for each $0.1 gold falls below $1,742.7
When Betting on a Market to Go Down Your Profits/Losses = (Opening Price – Closing Price) x stake per $0.1
 
Trading Example 3 Gold decreases and the spread betting market moves to $1,733.2 – $1,733.6.
Close and Take Your Profit? You could decide to leave your gold bet open or close it to take your profit. For this example, you opt to close your trade and buy the gold rolling daily market at $1,733.6.
Your Profits/Losses = (Opening Price – Closing Price) x stake per $0.1
($1,742.7 – $1,733.6) x £1 per $0.1
$9.1 x £1 per $0.1
Your Profits/Losses = £91 profit
 
Trading Example 4 Gold rises and the market is adjusted and moved to $1,750.2 – $1,750.6.
Time to Limit Your Loss?At this point, you may opt to leave your position open or close it in order to limit your losses. In this instance you opt to close your position by buying at $1,750.6.
Your P&L = (Opening Price – Closing Price) x stake per $0.1
($1,742.7 – $1,750.6) x £1 per $0.1
-$7.9 x £1 per $0.1
Your P&L = -£79 loss


Gold Notes:

  • Spread trading market prices taken from IG, November 2012
  • Gold is traditionally priced in dollars per troy oz
  • Investors could also choose to spread bet on Gold in euros/$0.1 move and dollars/$0.1 move
  • Financial spread betting also lets you trade on a wide range of other asset classes, for more information see:


Financial Spread Betting on Crude Oil Futures

Let’s assume that you are considering spread betting on Crude Oil Futures, so you look at a spread trading website, such as FinancialSpreads, and they are offering the current quote at:

Crude Oil Futures (March): $99.84 – $99.89

This is what you can expect from a futures spread betting market

The Spread Betting Market: Crude Oil Futures (March)
Spread: $99.84 – $99.89
How This Works: You can speculate on the Crude Oil Futures market settling:

  arrow_upward  Above $99.89, or
  arrow_downward  Below $99.84

At the close of trading on the expiry date for the ‘March’ futures market, 17 February 2012.

Be aware that, because this is a futures market, your position will be automatically closed when the March Crude Oil Futures markets expire, 17 February 2012. Nevertheless, you can close your spread bet before the closing date.
Trading Units: Spread bets on the Crude Oil Futures market are made in £x per cent.

Where a cent is $0.01 of the commodity’s price movement.

E.g. if the Crude Oil Futures market moves by 40¢ ($0.40) then you would win or lose 40 times your stake.
Stake per Unit: You decide how much you would like to risk per cent, e.g. £2 per cent, £5 per cent, £8 per cent, £10 per cent etc.
Brief Staking Example: If, for example, your stake was £3 per cent and the Crude Oil Futures market moves by $0.24 (24¢), you would win/lose £3 per cent x 24¢ = £72.


Spread Betting Example | Taking a Bullish View of Crude Oil Futures

Spread betting on Crude Oil to increase in value

You Decide to Go Long or Short: Where do you feel that the Crude Oil Futures market will finish at on 17 February 2012:

  arrow_upward  Above $99.89? or
  arrow_downward  Below $99.84?

Let’s Assume You Go Long:   arrow_downward  Above $99.89
You Decide How Much to Risk, Selecting: £2 per cent
What Happens Next?
  • You make a profit of £2 for each cent ($0.01) the Crude Oil Futures market settles above $99.89
  • You will lose £2 for every cent ($0.01) the Crude Oil Futures market closes lower than $99.89
If You Are Betting on a Market to Rise Your Trading Profits or Losses = (Final Price – Opening Price) x stake per cent
 
Situation 1 The price of a barrel of Crude Oil rises and the quote for the futures market is moved to $100.34 – $100.39.
Close and Take a Profit? You can choose to keep your futures spread bet open until expiry or close it to lock in your profit. For this example, you decide to close your trade at the current price by selling the market at $100.34.
Your Trading Profits or Losses = (Final Price – Opening Price) x stake per cent
($100.34 – $99.89) x £2 per cent
$0.45 x £2 per cent
45¢ x £2 per cent
Your Trading Profits or Losses = £90 profit
 
Situation 2 The Crude Oil Futures market moves lower and the spread trading market changes to $99.52 – $99.57.
Close and Restrict Your Loss? You may choose to keep your futures spread bet open until expiry or close it, i.e. close your spread bet and restrict your loss. For this example, you decide to settle your bet at the current market price and sell at $99.52.
Your Trading Profits or Losses = (Final Price – Opening Price) x stake per cent
($99.52 – $99.89) x £2 per cent
-$0.37 x £2 per cent
-37¢ x £2 per cent
Your Trading Profits or Losses = -£74 loss


Worked Trading Example | Going Short of Crude Oil Futures

Spread trading on the price of the Crude Oil market to fall

You Now Work Out Whether to Buy or Sell: Where do you feel the Crude Oil Futures market will settle on 17 February 2012:

  arrow_upward  Above $99.89? or
  arrow_downward  Below $99.84?

Let’s Say You Choose to Sell:   arrow_downward  Below $99.84
You Decide Your Stake, Opting for: £3 per cent
So What Happens Next?
  • You will lose £3 for every cent ($0.01) the Crude Oil Futures market closes above $99.84
  • You make a profit of £3 for every cent ($0.01) the Crude Oil Futures market closes below $99.84
If You Go Short With a Spread Bet Your Trading Profits or Losses = (Opening Price – Final Price) x stake per cent
 
Situation 3 The price of Crude Oil falls and the spread betting futures market is adjusted to $99.41 – $99.46.
Time to Lock in a Profit? At this point, you could opt to keep your futures trade open until expiry or close it, i.e. close your trade to lock in your profit. In this example you opt to settle your bet and buy at $99.46.
Your Trading Profits or Losses = (Opening Price – Final Price) x stake per cent
($99.84 – $99.46) x £3 per cent
$0.38 x £3 per cent
38¢ x £3 per cent
Your Trading Profits or Losses = £114 profit
 
Situation 4 The Crude Oil Futures market climbs and the spread betting market adjusts and moves to $100.11 – $100.16.
Close and Restrict the Loss?At this point, you can decide to keep your bet open until expiry or close it to restrict your loss. In this case you choose to settle your trade at the current rate by buying at $100.16.
Your Trading Profits or Losses = (Opening Price – Final Price) x stake per cent
($99.84 – $100.16) x £3 per cent
-$0.32 x £3 per cent
-32¢ x £3 per cent
Your Trading Profits or Losses = -£96 loss


Crude Oil Futures Notes:

  • Crude Oil Futures quote as per FinancialSpreads.com: June 2014
  • Crude Oil is traditionally priced in dollars per barrel
  • Many spread betting companies also allow you to spread bet on Crude Oil Futures in euros per cent and US dollars per cent

Commodities Spread Betting Guides

Individual commodities spread betting guides with worked trading examples for each market:

How to Analyse Commodity Markets

According to spread betting firm InterTrader, with commodities trading, there are mainly two groups of traders, those who:

A) Use technical analysis to guide their trading activities, or B) Believe that fundamental analysis is the only reliable way.

There is, however, also a smaller group of spread betting investors who use both types of analysis to aid their trading decisions.

Those who use technical analysis believe that the price of a trading instrument at any particular moment already incorporates all major news reports. As a result, ‘trading on the news’ would result in you forever chasing the price.

Traders who trust in fundamental analysis, on the other hand, believe that there is no way to predict future price behaviour by simply using statistical formulas that rely on past prices.

They regard fundamental economic issues, such as GDP, inflation, supply and demand as vital to the price of any trading instrument.

Trading Commodities News

If you study past price behaviour of commodities such as agricultural products and oil, it does become clear that there is a correlation between price and a variety of factors.

The problem with using this to guide your trading is that it is very hard to attach an accurate weighting to any specific factor.

News of a major oil discovery in one part of the world should, under normal circumstances, result in a drop in the oil price. However, this might be completely offset by news of strong economic growth in a major world economy which is likely to result in increased demand for oil.

Nevertheless, if you do decide to trade commodities by taking into account fundamental analysis, what type of information should you be considering?

Commodities – Supply Analysis
Any major news that negatively affects the supply of a particular commodity will, all things being equal, tend to push up the price of that commodity.

Such factors may vary from a civil war in a major oil producing country to news from the weather bureau about a pending drought which might affect the supply of coffee.

Even news about a major disaster hitting a large oil refinery could exercise significant upwards pressure on the price of crude, since it might well negatively affect supply in the near future.

Gasoline stocks typically decrease in the Spring as refineries undertake seasonal maintenance. Also crude oil firms will often reduce Winter-gasoline inventories in order to start stocking cleaner burning Summer-blends.

Also, as mentioned, any news factors that could cause a significant increase in supply levels, such as a major oil discovery or exceptional weather/harvests, could weigh on price levels.

Commodities Analysis and Stock Levels
Most countries keep stockpiles of important commodities such as oil and agricultural products as well as precious metals such as gold.

It makes sense that if a report suddenly reaches the market that US stockpiles of natural gas are being depleted because of a long spell of cold weather, it will have the immediate effect of pushing up the price of natural gas.

Conversely, large or increasing stockpiles will tend to put downward pressure on prices.

Figures for US stockpiles of petroleum, crude oil and natural gas are often published weekly. Many traders use these in conjunction with other market news to guide their trading activities.

Commodities – Demand Analysis
The price of a commodity is the balance between supply and demand at that particular moment.

If news should reach the market that a very cold winter is expected in the Northern Hemisphere, we can expect the price of heating oil, and possibly crude oil, to increase.

Unfortunately, real life trading is seldom that simple. If the European Central Bank should, at the same time, issue a warning about a looming recession in the EU, the net effect could well be for the price of oil to decline in anticipation of weaker overall demand.

Commodities Prices and the Forex Markets
The foreign exchange markets can also have a major impact when spread betting on commodities. Most commodities are priced in US dollars and therefore those markets are irrevocably linked to the US currency.

Any news that could lead to a weaker dollar, for example, could push up the price of that commodity.

By contrast, an increase in US interest rates might cause a jump in the value of the dollar. This would make the commodity relatively more expensive in terms of other currencies and so the price may decline to compensate.

Spread Betting on Commodities Trading – Case Studies

Brent Crude Oil Trading Example – August 2011
Looking at Inter Trader‘s daily Brent crude oil candlestick chart below, on the 3rd and 4th of August 2011 the price of a barrel of Brent crude oil fell from $115.70 to a low of $107.00. What caused this major drop?

If we review the global news for that week, we see newspaper headlines such as: “Asian markets tumble on Euro fears and US losses.” and the Dow Jones index falls by 512 points in largest one-day fall since late 2008.”

This shows that the financial news at the time portrayed a very gloomy and negative outlook for the world’s major economies. Such weakness would negatively affect future demand for crude oil and this is what caused the decline in price.

Brent Crude Oil Chart Trading Example


Sugar Trading Example – October 2011
Looking at the daily sugar candlestick chart below, we can see that the price of sugar fell from $27.13 on the 28th of October to a low of $25.28 three days later. Why did this happen?

One significant factor seems to have been that Brazil, the world’s largest sugar producer, saw better than expected output. This, along with weaker than anticipated demand from the food manufacturing and preparation sectors, encouraged a drop in prices.

Sugar Chart Trading Example


‘Spread Betting on Commodities – Fundamental Analysis’ – review written by InterTrader.


AuthorAlex Turner

Senior Editor, SpreadBetMagazine