Supply and Demand Fundamentals
Expert-defined terms from the Certificate in Physical Commodity Markets course at London School of Planning and Management. Free to read, free to share, paired with a professional course.
**Arbitrage #
** The simultaneous purchase and sale of a commodity in different markets to take advantage of price discrepancies.
**Backwardation #
** A market situation where the futures price of a commodity is lower than the spot price. This can lead to increased demand for the commodity in the physical market and encourage storage of the commodity for future sale.
**Basis #
** The difference between the cash price and the futures price of a commodity. A positive basis indicates that the futures price is higher than the cash price, while a negative basis indicates that the futures price is lower.
**Commodity Futures #
** A standardized contract traded on a regulated exchange that obligates the buyer to purchase, and the seller to sell, a specific quantity and quality of a commodity at a predetermined price and date in the future.
**Contango #
** A market situation where the futures price of a commodity is higher than the spot price. This can lead to decreased demand for the commodity in the physical market and encourage production of the commodity for future sale.
**Crack Spread #
** The difference between the price of crude oil and the price of refined products such as gasoline and heating oil. A crack spread can be used as a hedge by refiners to manage the risk associated with the price difference between crude oil and refined products.
**Delivery #
** The physical transfer of a commodity from the seller to the buyer as required by the terms of a futures contract.
**Demand #
** The quantity of a commodity that consumers are willing and able to purchase at various prices during a specific time period.
**Eligible Commodities #
** Commodities that are approved for delivery against a futures contract.
**Exchange #
** A regulated marketplace where standardized contracts, including futures and options, are traded.
**Futures Price #
** The predetermined price at which a commodity will be bought or sold in the future, as specified in a futures contract.
**Hedging #
** The use of futures contracts to manage price risk. Producers and consumers of commodities can use futures to lock in prices and protect against price fluctuations.
**Inventory #
** The total supply of a commodity that is held by producers, merchants, and consumers.
**Market Imbalance #
** A situation where the demand for a commodity exceeds the available supply, or where the supply of a commodity exceeds the demand.
**Option #
** A contract that gives the buyer the right, but not the obligation, to buy or sell a commodity at a predetermined price and date in the future.
**Physical Commodity #
** A tangible good that is used or traded, such as grains, metals, or energy products.
**Price Discovery #
** The process of determining the market price of a commodity through the interaction of buyers and sellers in a competitive market.
**Production #
** The process of creating or extracting a commodity from natural resources.
**Quality #
** The specific characteristics of a commodity, such as purity, size, or grade, that affect its value.
**Regulated Market #
** A marketplace where trading is overseen by a government agency or other regulatory body to ensure fair and transparent practices.
**Risk Management #
** The process of identifying, evaluating, and controlling potential risks in a business or financial context.
**Spot Price #
** The current market price at which a commodity can be bought or sold for immediate delivery.
**Speculation #
** The act of buying or selling a commodity with the hope of making a profit from price fluctuations, rather than for the purpose of using or delivering the commodity.
**Spread #
** The difference between the price of two related commodities or futures contracts.
**Supply #
** The quantity of a commodity that producers are willing and able to sell at various prices during a specific time period.
**Volatility #
** The degree of fluctuation in the price of a commodity over time.
**Warehouse Receipt #
** A document issued by a warehouse to the owner of a commodity that is stored in the warehouse. A warehouse receipt can be used as proof of ownership and can be traded as a commodity.