- CFA Exams
- 2024 Level II
- Topic 8. Alternative Investments
- Learning Module 39. Introduction to Commodities and Commodity Derivatives
- Subject 1. Characteristics of Commodity Sectors
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Subject 1. Characteristics of Commodity Sectors PDF Download
Commodities are a diverse asset class comprised of various sectors. Each of these sectors has a number of characteristics that are important in determining the supply and demand for each commodity, including ease of storage, geopolitics, and weather.
Crude oil must be extracted, transported, and refined into useful products. The source determines the quality and price of crude oil. The drivers of global oil demand and supply are technology, politics, and the business cycle. The most dramatic risk factor in the supply of oil is the geopolitical conflict in the Middle East.
Natural gas can be used directly. Its storage and transportation costs are relatively high. The global drivers of natural gas supply and demand are similar to those of crude oil. Weather is a key driver of demand.
Refined products such as gasoline have a short shelf life. Bad weather can disrupt supply. Environmental mandates also have significant impact on processing costs.
Grains can be stored for a few seasons. Weather can significantly impact supply. Technology and politics play a key role in supply and demand too.
Industry (Base) Metals
These are used in industrial production and durable goods manufacturing. Demand is directly associated with GDP growth. They can be stored for years. Weather, business cycle, politics, and environmental concerns can all affect supply and demand (and thus pricing).
It is storable. Storage costs are tied to grain prices. The final product (slaughtered animals) can be stored longer. Weather, disease, and regulations can all impact the supply of livestock.
Gold, silver, and platinum can act as stores of value. They can be stored for a long time without being affected by weather. Global supply and demand are the main factors that shape this market.
Softs (Cash Crops)
Storability is an issue because some products require freshness. Weather plays a critical role in growing soft commodities (e.g., cotton, sugar, coffee, and cocoa). Demand is closed related to global wealth.
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