Types of Commodity Futures Markets

The futures market for a commodity can be normal or inverted.

Normal Futures Market



A normal futures market is one where the price of the nearby contract is less than the price of the distant futures contract. This is illustrated by the figure below, which shows the prices of gold futures in a normal market. The more distant the contract month, the higher is the contract price, in a normal market. The price difference between the futures contracts of different months is due to the cost of carry. The cost of carry is the cost incurred in carrying a commodity to some future date. It includes interest, insurance and storage costs. This is logically what should happen for all contracts since cost of insurance, interest and storage will be a finite positive number.

Normal Futures Market



Inverted Futures Market



In an inverted futures market, the price of the near contract is greater then the price of the distant contract. As shown in the figure below, the more distant the contract, the lower is the price.

An inverted futures market is seen when there are short term supply disruptions, resulting in shortages.

Inverted Futures Market



Once we understand the types of commodity market participants it is essential to understand the concept of commodity basis along with the definition and how to calculate basis from spot and futures price to make better trading decisions for optimizing your returns.

In the next chapter we will learn about concept of commodity basis along with it's definition and how to calculate basis from spot and futures price.


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