How to Research Commodities

Close-Up of exchange market data wall showing price, volume, and the day's change in price.
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Researching commodities is a very broad topic, and there is no simple procedure that works for every commodity trader. Oil, copper, and nickel are examples of commodities. A commodity is an item that is used in the production of other goods. Commodities must meet basis grade or specific minimum standards, so, they are also interchangeable.

Do not expect to become an expert and sift through mounds of data when researching commodities. You want enough information to make rational trading decisions. When trading the commodity markets, there are many levels of research to consider. A robust approach to gathering data on these markets always includes both a technical and a fundamental approach.

Commodity Profiles

The first thing you want to do is learn about individual commodities. You want to know where, when, and how a particular commodity trades. You also want to know what news, reports, and events move the market. You can find a great summary of this information at the commodity profiles page.

Research Reports

Commodity research can come from many different sources. There is more information produced than you can read, understand, and digest in a day. It is suggested you find a few trusted and reliable sources to begin your study and slowly expand from there.

Research firms publish commodity reports daily or weekly. It can often be a great place to get more in-depth research on commodities and also get market opinions from commodity analysts or traders who write the reports. It is suggested that you not rely too heavily on these reports for recommendations. You should always do your own research. However, it is good to know what professional traders are thinking.

Many futures clearing firms provide proprietary reports for their clients. There are also some good newsletters that you can read daily. There are also some good free reports you can find online.

Commodities News

Commodity traders can also check the daily news before and after the markets open and close to give them an idea as to why a market is moving. Bloomberg, Reuters, Market Watch, The Wall Street Journal, and many other news outlets offer commodities news throughout the day.

Fundamental Commodity Research

Fundamental analysis looks at commodities in relation to economic and financial data. It looks at any factor that could impact the price direction of the commodity. Fundamentals provide insight into the supply and demand structure of each commodity market. Understanding the total amount of production of a commodity together with inventories or stockpiles and comparing it to consumption is necessary to establish whether a glut or deficit exists in a raw material market. If an excess exists, the price of the commodity tends to move lower, and if a shortfall condition is present, the path of least resistance for the price is usually higher.

There is a myriad of data sources available, free of charge for investors and traders who wish to analyze markets. In energy markets, the Energy Information Administration and American Petroleum Institute provide weekly and periodic data on consumption and production of crude oil, natural gas, and other energy commodities.

In the agricultural sector, the U.S. Department of Agriculture issues weekly and periodic reports, including the monthly World Agricultural Supply and Demand Estimates (WASDE) report. In other commodities, trade associations and government data are available for those who take the time and effort to compare output and inventory versus demand.

Fundamentals often provide a reliable picture of the current and future state of commodity prices and whether they are more likely to move higher or lower over time.

Technical Considerations

While fundamental research is data-driven, technical research is time-driven. This method analyses trends of price and trading activity movement. Technical analysis attempts to understand the historical price pattern of a commodity and use that past behavior to predict future direction.

In the world of commodities, history tends to repeat itself. Therefore, a market participant with a keen eye and understanding of statistics and technical studies can look at a price chart and make educated guesses on the future direction of price.

Since all market participants look at the same historical data, they often come to similar conclusions. When a bullish or bearish pattern develops on a price chart, technicians often act in the same way either buying or selling based on the chart formation. Chart interpretation often results in a self-fulfilling prophecy for prices as herd behavior often has tremendous influence over prices. 

The Technomental Conclusion

A combined approach to commodity research tends to offer optimal results. The fundamental and technical analysis used together amounts to covering many bases when it comes to understanding the present state of a market and predicting future price behavior for that market. It is important to keep in mind that knowledge of macroeconomic factors also plays an important role in the direction of raw material prices.

As commodities tend to be highly volatile assets, unexpected events can always throw a monkey wrench into even the most robust analysis. It is that volatility that attracts speculators, traders, and investors alike. Price volatility creates the opportunity for profits but at the same time, makes the raw material markets dangerous from a risk perspective.