Commodity Spot vs. Futures Prices: How to Tell Them Apart
Understand commodity spot and futures prices through delivery timing, quality, and settlement terms. Avoid confusing returns on margin with contract value changes or misreading continuous futures charts.
Spot prices describe terms for near-term physical transactions, while futures prices relate to standardized contracts with specific maturities. Prices for the same commodity can differ with delivery location, quality, and maturity. A percentage change in a futures price should not be equated with a return on margin or a return from holding the physical commodity.
Read the contract specifications behind the price label
Products are not identical simply because they share a name such as copper or crude oil. A spot quote specifies where physical goods will be delivered and at what quality; a futures contract includes an exchange-defined maturity and contract size. The LME describes a futures contract as an obligation to trade a standardized quantity on a specified date at a specified price. Price comparison tables should therefore record the exchange, reference contract month, quantity unit, and whether settlement is physical or in cash, as well as the commodity. For products with significant regional premiums or transportation costs, separately record the gap between the international benchmark and the company’s actual purchase price.
Margin is not the full purchase price
Futures margin serves as collateral supporting contract performance and differs from the full contract value. A small price move can produce a large gain or loss relative to margin, and maintaining the position may require additional cash. Even when a company hedges physical input costs, derivative settlement before the actual goods are sold can create liquidity pressure. When describing futures returns, show contract notional value, cash collateral, and profit or loss separately. A small collateral amount does not mean the economic risk is small.
Continuous futures charts may differ from an actual holding path
When a price service automatically joins successive nearby contracts, the prices of different contracts are linked on rollover dates. Figures that appear to be returns depend on whether the chart provider adjusts historical prices and when it switches contracts. Actual investing involves buying and selling specific contracts and entering the next maturity, so transaction costs and price differences between contract months matter. CME’s explanation of futures curves provides a starting point for understanding prices across maturities. Do not use spot price increases to predict an investment product’s performance before reading the rollover rules of the index it tracks.
Worked example
Hypothetical example: A hypothetical futures contract for 100 tonnes of a commodity priced at $100 per tonne has a notional value of $10,000. If the price falls to $95, a long position loses $500. Assuming initial collateral of only $1,000, the loss is 50% of that collateral, even though the contract price fell 5%. This is an illustrative contract, not an actual exchange specification or margin ratio. The possibility of additional margin payments and forced liquidation must also be considered separately.
What to check
- Have you checked delivery location, quality, and maturity even for the same commodity?
- Have you aligned the price unit with the quantity in one contract?
- Have you distinguished margin from notional value as the denominator for returns?
- Have you checked how the continuous chart rolls contracts and adjusts prices?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.