Reference

The conversions and vocabulary that make the rest of the handbook readable.

Conversion Factors

Glossary

Arbitrage

Buying and selling the same or closely related commodity in two markets at the same time to capture a price discrepancy. Physical arbitrage moves cargoes between regions; financial arbitrage trades related contracts against each other.

Assay

A chemical analysis that determines the purity or grade of a metal or ore. Exchange delivery standards, refinery purchases, and concentrate contracts all settle against assay results.

Backwardation

A forward curve in which prices for later delivery are below the spot or near-term price. It usually signals physical tightness: buyers pay a premium to get the commodity now rather than later.

Basis

The difference between the price of a physical commodity at a specific location or grade and the benchmark futures price. A Gulf Coast diesel cargo trades at a basis to the NYMEX contract; Midwest corn trades at a basis to CBOT.

Basis risk

The risk that a hedge fails to track the exposure it covers because the hedging instrument and the physical position are not identical in location, grade, or timing. An airline hedging jet fuel with crude futures carries basis risk on the jet-crude spread.

Bcf / bcm

Billion cubic feet and billion cubic metres, the standard large units for natural gas volumes. One bcm is roughly 35.3 bcf; US data is usually published in bcf and international data in bcm.

Benchmark

A widely referenced price against which other transactions are set, such as Brent for crude oil, Henry Hub for US gas, or the LBMA Gold Price. Most physical trade prices as a differential to a benchmark rather than at a flat negotiated number.

Boe

Barrel of oil equivalent: a unit that expresses other energy sources, usually natural gas, in terms of the energy in one barrel of crude. The common convention is roughly 5.8 MMBtu, or about 6,000 cubic feet of gas, per boe.

Bunker fuel

Fuel burned by ships. Since the IMO 2020 sulfur rule the dominant grade is VLSFO at 0.5 percent sulfur, alongside marine gasoil and high-sulfur fuel oil burned by vessels fitted with exhaust scrubbers.

Cap and trade

An emissions policy in which a government sets a declining cap on total emissions, issues or auctions allowances up to that cap, and lets emitters trade them. The EU Emissions Trading System is the largest example and made carbon a traded commodity.

Carry

The cost of holding a physical commodity through time: storage, insurance, and financing, minus any benefit of holding it. A contango wide enough to cover full carry makes storage profitable; traders call that a cash-and-carry trade.

Cash settlement

Settling an expiring contract with a money payment against a reference price instead of delivering the physical commodity. ICE Brent futures, iron ore swaps, and most power and freight derivatives settle in cash.

CBAM

The EU Carbon Border Adjustment Mechanism, which charges importers of carbon-intensive goods such as steel, aluminium, cement, and fertilizer for the emissions embedded in them, mirroring the EU carbon price. Reporting began in 2023 and the financial obligation phases in from 2026, pushing carbon costs into global metals trade.

CIF / FOB

Incoterms that define where ownership and cost transfer in a cargo sale. FOB (free on board) prices the commodity loaded at the export port with the buyer paying freight; CIF (cost, insurance, and freight) includes delivery to the destination port. The CIF-FOB difference is essentially the freight market.

Contango

A forward curve in which prices for later delivery are above the spot or near-term price, the opposite of backwardation. It typically reflects ample supply and reimburses storage; a very steep contango signals a glut.

Contract month

The delivery or settlement month of a futures contract, such as December corn or March Brent. Liquidity concentrates in the nearest few contract months, and positions are rolled forward as each one approaches expiry.

Crack spread

The margin from refining crude oil into products, quoted as product futures minus crude futures. The 3-2-1 crack (three barrels of crude into two of gasoline and one of diesel) is the standard proxy for US refinery economics.

Crush spread

The margin from processing soybeans into soybean meal and soybean oil, traded as a spread between the three CBOT contracts. One 60 lb bushel of beans yields roughly 44 lb of meal and 11 lb of oil.

Dark spread

The gross margin of a coal-fired power generator: the power price minus the cost of the coal burned to produce it. The carbon-adjusted version, which also deducts the cost of emissions allowances, is called the clean dark spread.

Delta

The sensitivity of an option's value to a small change in the underlying price, ranging from 0 to 1 for calls and 0 to -1 for puts. Option sellers hedge by holding delta-equivalent futures positions and adjusting as the market moves.

EFP

Exchange for physical: a privately negotiated transaction in which a futures position is exchanged against an equivalent physical position, bridging the paper and physical markets. In precious metals the EFP is the quoted spread between COMEX futures and loco London metal.

Energy transition minerals

The metals and minerals required at scale by electrification and low-carbon energy: lithium, cobalt, nickel, copper, graphite, rare earths, and uranium among them. Their supply chains, often concentrated in a few countries, have become a matter of industrial policy as well as commodity trading.

ETF

Exchange-traded fund: a listed security that tracks a commodity price, in some cases backed by physical holdings. Physically backed gold ETFs hold allocated bars, so investor inflows translate directly into bullion demand.

FFA

Forward freight agreement: a cash-settled derivative on shipping rates, settled against Baltic Exchange route assessments. FFAs let shipowners and charterers hedge dry bulk and tanker freight without touching a physical vessel.

Force majeure

A contract clause that suspends delivery obligations when an extraordinary event beyond a party's control, such as a hurricane, war, or plant explosion, prevents performance. A force majeure declaration by a major producer is itself market-moving news.

Forward curve

The set of prices for a commodity across all traded delivery dates, plotted from prompt to the most distant month. Its shape, contango or backwardation, summarizes the market's view of current versus future scarcity and drives storage and hedging decisions.

Futures contract

A standardized, exchange-traded agreement to buy or sell a set quantity and quality of a commodity at a set future date, with a clearing house guaranteeing both sides. Most futures positions are closed out before expiry rather than delivered.

Heat rate

The amount of fuel energy a power plant burns to generate one kilowatt-hour of electricity, quoted in Btu/kWh. A lower heat rate means a more efficient plant; 3,412 Btu/kWh would be perfect conversion, and modern gas plants run near 6,400 to 7,000.

Hedge

A position in derivatives taken to offset the price risk of a physical exposure: a producer sells futures against future output, a consumer buys them against future needs. The goal is to lock in margin or cost, not to profit from the derivative itself.

HHV / LHV

Higher and lower heating value, two conventions for the energy content of a fuel. HHV counts the heat recovered by condensing the water vapor formed in combustion; LHV does not, so it is roughly 10 percent lower for natural gas. US gas markets and LNG cargo pricing quote HHV; IEA energy statistics and most power-plant efficiency figures use LHV, so mixing conventions is a classic conversion error.

Index fund

An investment vehicle that holds a basket of commodity futures weighted by a published index such as the S&P GSCI or Bloomberg Commodity Index, rolling positions forward each month. Index flows give commodities a passive investor base alongside hedgers and speculators.

Initial margin

The collateral a clearing house requires when a futures position is opened, sized to cover potential losses over a short liquidation period. It is a performance bond, not a down payment, and rises when volatility rises.

In-the-money

An option that would have positive value if exercised immediately: a call with the strike below the market, or a put with the strike above it. Options with no immediate exercise value are out-of-the-money.

LBMA

The London Bullion Market Association, the trade body that sets the Good Delivery standards for gold and silver bars and administers the LBMA Gold and Silver Price benchmark auctions. LBMA accreditation determines which refiners' bars are acceptable in the London market.

LFP battery

Lithium iron phosphate, a battery chemistry that uses no nickel or cobalt and now powers a majority of new electric vehicles in China plus most grid storage. Its rise restructured battery metals demand: stronger for lithium and iron phosphate, weaker for cobalt and high-purity nickel.

LME warrant

A document of title to one lot of metal in an LME-approved warehouse, specifying brand, shape, and location. Warrants are what actually changes hands on physical settlement of LME contracts, and warrant inventory data is a closely watched supply indicator.

LNG

Liquefied natural gas: methane cooled to roughly minus 162 degrees Celsius, shrinking its volume about 600 times so it can ship by tanker. LNG connected the world's regional gas markets into a single, price-responsive global trade.

Loco London

The standard delivery basis of the wholesale precious metals market: metal held in a London vault and transferred across the books of the bullion clearing banks. Prices elsewhere in the world quote as premiums or discounts to loco London.

MMBtu

One million British thermal units, the standard energy unit for pricing natural gas in North America and LNG globally. Henry Hub futures and most LNG contracts quote in USD per MMBtu; one MMBtu equals 1.055 gigajoules.

MOC (Market on Close)

The structured trading window, run by Platts and other price reporting agencies, in which bids, offers, and trades submitted before a daily cutoff determine the published physical price assessment. Dated Brent and most Asian oil benchmarks are set through MOC processes.

Naked position

An outright long or short position with no offsetting physical exposure or hedge, taken purely to profit from a price move. Selling options naked, without owning the underlying, carries open-ended risk.

NGLs

Natural gas liquids: ethane, propane, butanes, and natural gasoline, separated from raw gas at processing plants. They price individually at hubs such as Mont Belvieu and feed petrochemicals, heating, and gasoline blending.

OPEC+

The coordination framework, formalized in 2016, between OPEC and a group of non-OPEC producers led by Russia, managing crude output targets to influence prices. Its quota decisions, and the gap between quotas and actual production, are central inputs to any oil balance.

Open interest

The total number of futures or options contracts outstanding that have not been closed, delivered, or exercised. Rising open interest alongside a price move suggests new money entering; falling open interest suggests positions being unwound.

Option

A contract giving the buyer the right, but not the obligation, to buy (call) or sell (put) the underlying at a set strike price by a set date, in exchange for a premium. Producers buy puts as price floors; consumers buy calls as price caps.

OTC

Over-the-counter: trading negotiated bilaterally between counterparties rather than on an exchange, covering swaps, forwards, and bespoke structures. Since post-2008 reforms, most standardized OTC commodity swaps are centrally cleared even though they are not exchange-listed.

PDH

Propane dehydrogenation: a plant that converts propane directly into propylene, bypassing the traditional refinery and steam cracker routes. A large PDH build-out in China made global propylene supply, and hence propane demand, a major pull on US NGL exports.

Physical delivery

Settlement of an expiring futures contract by actually transferring the commodity under the exchange's rules on grade, location, and timing, as with WTI at Cushing or LME metal on warrant. The credible threat of delivery is what forces futures and physical prices to converge.

PRA (price reporting agency)

An independent publisher, such as Platts, Argus, OPIS, or Fastmarkets, that assesses daily prices for physical commodities where no exchange print exists. Vast volumes of physical trade settle against PRA assessments, making their methodologies part of market infrastructure.

Price cap (G7 Russian oil)

The sanctions mechanism introduced in December 2022 under which G7 and EU firms may ship, insure, or finance Russian seaborne oil only if it is sold at or below a set price. It pushed Russian exports toward a parallel fleet of tankers operating outside Western services, often called the shadow fleet.

Prompt date

The nearest standard delivery date for a contract. On the LME the prompt structure is daily, with three-month metal as the liquid reference; in oil, prompt means the earliest cargo or pipeline cycle still available to trade.

Renewable diesel

A hydrocarbon diesel made by hydrotreating fats and vegetable oils, chemically similar to petroleum diesel and usable without blending limits, unlike biodiesel. US and European mandates built a large industry around it and tied vegetable oil markets tightly to diesel policy.

Roll yield

The gain or loss from rolling an expiring futures position into a later month. Rolling in backwardation buys the cheaper deferred contract and adds to returns; rolling in contango does the opposite and erodes them, a major driver of long-run commodity index performance.

Settlement price

The official daily price an exchange publishes for each contract, used to mark positions to market, calculate margin flows, and settle cash-settled contracts. It is typically derived from trading in a defined closing window.

Spark spread

The gross margin of a gas-fired power generator: the power price minus the cost of the gas burned to produce it, calculated at an assumed heat rate. The clean spark spread also deducts the cost of carbon allowances.

Spot

The price for a commodity bought or sold for immediate or very near-term delivery, as opposed to forward or futures prices for later dates. In many physical markets the practical spot reference is a PRA assessment rather than an exchange quote.

Spread

The price difference between two related instruments, traded as a single position: between delivery months (calendar spread), locations, grades, or a raw material and its products. Much of professional commodity trading is spread trading rather than outright direction.

Squeeze

A situation in which holders of short positions cannot obtain the physical commodity or liquidity needed to exit, forcing them to pay sharply higher prices. Squeezes cluster around delivery points and expiries; the LME nickel crisis of March 2022 is the modern cautionary tale.

Strategic petroleum reserve

Government-owned crude oil and product stocks held for supply emergencies, such as the US SPR in Gulf Coast salt caverns and the IEA members' collective 90-day import cover obligation. Release and refill decisions have become an active tool of price management, not just emergency response.

Swap

An agreement to exchange a floating commodity price for a fixed price over a set period, settled financially against a published index. Swaps are the workhorse hedging tool for exposures that exchange futures do not match exactly.

TC/RCs

Treatment and refining charges: the fees a copper smelter earns for converting mined concentrate into refined metal, quoted in dollars per tonne of concentrate and cents per pound of contained copper. Low TC/RCs signal that concentrate is scarce relative to smelting capacity.

Term contract

A supply agreement covering regular deliveries over an extended period, often a year or longer, usually priced against a benchmark or index rather than at a fixed number. Most physical oil, LNG, and concentrate volume moves on term contracts, with the spot market handling the balance.

Tick

The minimum price increment a contract can move, defined by the exchange, such as one cent per barrel for WTI futures. Tick size times contract size gives the cash value of the smallest possible move.

Variation margin

The daily cash flow that settles each position's mark-to-market gain or loss with the clearing house. Unlike initial margin, it is realized profit and loss moving between winners and losers every day, which is why hedgers need cash liquidity even when their hedges are working.

VLSFO

Very low sulfur fuel oil, the 0.5 percent sulfur marine fuel that became the global shipping standard when the IMO 2020 regulation cut the previous 3.5 percent limit. It is now the main bunker fuel benchmark, assessed at hubs such as Singapore and Rotterdam.

Volatility

The size of price fluctuations, usually expressed as an annualized percentage standard deviation of returns. Realized volatility measures what prices actually did; implied volatility is the level embedded in option prices, the market's forecast of turbulence ahead.

Warehouse receipt

A document of title proving ownership of a specific quantity of a commodity in a licensed warehouse, deliverable against futures contracts and usable as loan collateral. Fraud against warehouse receipts, as in the Qingdao metals scandal of 2014, periodically reminds lenders to verify the metal exists.

WASDE

The World Agricultural Supply and Demand Estimates, a monthly USDA report projecting production, consumption, trade, and ending stocks for major crops and livestock. Its release is the single most important scheduled data event in grain and oilseed markets.