How commodities trade
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
9 min read · updated November 5, 2026
An airline does not know what it will pay for fuel next summer, and fuel is one of its biggest costs. An oil producer does not know what it will be paid for next year's barrels, and that price decides whether it can pay its debt. One is hurt when oil rises, the other when it falls. A commodities desk stands between them, and much of what it does is take the risk one side wants gone and pass it to someone who wants the other side of it.
The commodities desk is part of FICC on most trading floors, but interviewers rarely expect a specialist's depth. They want to know what the desk trades, who its clients are and why they trade, what moves the prices, and how a hedge works with a number. That is this lesson. The pricing of futures (cost of carry, contango and roll yield) is in derivatives, forwards and futures, and gold and oil as market stories are in how markets move together.
Commodity prices are set by physical supply and demand, and supply cannot change fast: a new oil field or copper mine takes years, a crop takes a season. So small shifts in supply or demand cause big price swings, and the businesses on both sides pay banks to take that swing off their hands. Producers sell forward and consumers buy forward. The desk sits in the middle.
What the desk trades
| Group | Main products | Benchmarks you should know |
|---|---|---|
| Energy | Crude oil, refined fuels (gasoline, diesel, jet fuel), natural gas, power | Brent (the global oil benchmark), WTI (the US one, delivered in Cushing, Oklahoma), Henry Hub natural gas |
| Metals | Precious (gold, silver, platinum) and base or industrial (copper, aluminum, nickel, zinc) | Gold and copper on COMEX in New York, base metals on the London Metal Exchange |
| Agriculture | Grains (corn, wheat, soybeans), softs (coffee, sugar, cocoa, cotton), livestock | Corn, wheat and soybeans on the Chicago Board of Trade |
Banks trade almost all of this through derivatives, not physical goods:
- Futures on exchanges, the most liquid way to buy or sell a set amount at a set date. One crude oil contract is 1,000 barrels.
- Swaps, the main hedging tool for corporate clients. A commodity swap exchanges a fixed price for the floating market price on an agreed volume over a period, settled in cash. Nobody delivers a barrel to anyone.
- Options, for clients who want protection but want to keep some upside.
A few banks also handle physical commodities, and large trading houses do it as their core business, moving cargoes of oil and ore around the world. Most bank desks today stay on the financial side.
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Frequently asked
- What does a commodities trading desk do?
- It makes prices in energy (oil, natural gas, power), metals (gold, copper, aluminum) and agriculture (corn, wheat, soybeans), mostly through futures, swaps and options rather than physical barrels or bushels. Its core clients are producers hedging what they sell and consumers hedging what they buy, alongside hedge funds and index investors.
- Who are a commodities desk's clients?
- Producers such as oil companies, miners and farmers, who sell forward to lock in what they will be paid. Consumers such as airlines, utilities and manufacturers, who buy forward to lock in what they will pay. Then hedge funds and trend followers trading views, and index investors holding commodities in a portfolio.
- What moves commodity prices?
- Supply and demand for the physical good. Supply: production decisions such as OPEC+ output targets, US shale drilling, mine output, harvests and disruptions. Demand: global growth, above all China, and the season. Inventories show the balance between the two week by week, and weather moves gas, power and crops. A stronger dollar tends to weigh on prices, since most commodities are priced in dollars.
- How does an airline hedge jet fuel?
- Usually with a swap or options from a bank. In a swap the airline agrees to pay a fixed price per gallon on a set volume and receive the market price. If fuel rises, the bank pays the airline the difference; if it falls, the airline pays the bank. Either way its net cost is the fixed price. A collar, buying a call and selling a put, caps the cost while keeping some benefit if prices fall.
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