Fundamental Analysis in Commodities Trading

Fundamental analysis encompasses the study of the factors that affect supply and demand. Prices will usually fall when supply is great relative to demand. In contrast prices will generally rise when demand is large relative to supply. It is however more complex than that, as any analysis needs to include affects supply and influences demand at any given time.

Commodity prices can be affected by many things. Taxes, inflationary pressures and money supply, political events, weather, transportation costs and technological changes all have an influence, along with a dozen other large-scale causes.

Beyond the general factors, the detailed answers depend heavily on which commodity a trader researches.

'Softs' - sugar, cocoa, coffee and a few others - are agricultural products in demand all over the world by millions, which is why they make excellent commodities. As such, their demand is affected mostly by price with some minor influence from cultural factors. An example is that sugar demand is suppressed slightly by newspaper exposes about the alleged evils of consumption and obesity. However, supply is influenced by weather, soil quality and moisture levels, transportation costs, insect population changes, etc.

Having an almost opposite profile are the ‘energies’, such as crude oil and natural gas. Supply grows very slowly, due to technological and political factors, whereas demand has been rising for decades and continues to grow. With both China and India’s economies growing, there is a heavy demand for energy to build new buildings, increase manufacturing plants, heat and power homes and a hundred other uses.

Luckily there are a variety of data sources available, no matter what commodity an investor considers.

Just one example of a considerable source of information about softs or grains are the crop and weather reports available from the USDA (U.S. Dept of Agriculture), either procured directly or through your broker.

Information can often be obtained directly through the exchanges themselves, especially in the area of mining levels, information about new sources of gold, silver, platinum and a dozen other factors affecting supply. (See http://www.thebulliondesk.com/ or http://www.amm.com/ as just two examples.)

Oil is discussed continuously on the front pages of newspapers, and further information is easy to obtain. An example is Offshore Engineer, just one excellent source of information about offshore oil news. (See http://www.oilonline.com/oe/)

After oil, coffee is the second most widely traded commodity. That tells you something about the world. It has been a popular product for over 200 years and is grown in a dozen countries. Prices have been depressed recently, owing to large supplies, though demand remains strong and is likely to continue.

For data see the International Coffee Organization website: http://www.ico.org/ and in particular the statistics page at http://dev.ico.org/trade_statistics.asp. For current prices see: http://dev.ico.org/prices/pr.htm. It is easy to see from this information that coffee trading is here to stay.

There is a basic difference in fundamental analysis when dealing with commodities as opposed to with the stock market, however. While trades are made every day on the stock market, the average investor tends to take a slightly longer view. However, most investors trade with a short term view in relation to commodities. In order to profit, it is therefore important to use fundamental analysis along with technical analysis.

         

More Basic Commodities Trading Training Articles