To be able to trade in the commodity derivatives market, investors often use tools to analyze the volatility of a particular commodity. In the investment market, there are always 2 types of analysis that are technical analysis and fundamental analysis, and commodity derivatives trading is no exception.
What is fundamental analysis in commodity derivatives trading?
Fundamental analysis in commodity derivatives trading is price prediction analysis based on fundamental analysis of Supply and Demand.
When looking at the price of a commodity, the concept of Supply – Demand is a simple equation. But things get complicated when you try to forecast the price direction in the future.
Commodities are traded in cycles, and sometimes the supply of a certain commodity such as corn or wheat will be tight and this causes a scarcity of supply to push prices up. Conversely, when there are too many goods, the Supply is greater than the Demand, the price will decrease. Traders want to look at commodities that are trading at multi-year highs or lows. Ultimately the picture tends to change leading to profitable trading opportunities.
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Price movements in commodities trading using fundamental analysis can be broken down into simple formulas:
Demand > Supply = Price goes up
Supply > Demand = Price falls
DEMAND FOR GOODS
Demand for a good is the quantity consumed at a given price. The general rule is that demand will increase when the price of a good falls and demand will decrease when the price of a good rises.
SUPPLY OF GOODS
The supply of some goods is the amount carried over from previous years of production – stockpiles, and the quantity being produced this year. Example: The current soybean supply consists of crops grown in the ground and the amount left over from previous crops. Usually, the more stocked, the more volatile the price.
And there are many other factors that affect the supply of goods such as strikes, weather, amount of land, crop diseases and technology. It is important to note when using fundamental analysis that higher commodity prices lead to an increase in production. Everyone wants to make a profit, so it is more profitable to produce a certain item when prices are high. And demand will often fall when prices go up. And if the demand is reduced enough, it will put downward pressure on prices.
