How are commodity spot prices different than futures prices?

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Dan Stewart, CFA®
Revere Asset Management, Dallas, TX

The easiest way to think of this is that a spot price is the price to settle a commodity contract immediately – both the price and delivery terms. You are settling on the spot, hence “spot contract.”

A futures contract will occur in the future, not immediately, hence “futures contract.” With a futures contract you are locking in a price for a contract on a commodity – size, quantity and quality – at a specified date in the future.

You would think that futures prices will always be more than spot prices. But expectations of the commodity itself will affect price as well. This includes whether it will go up or down in price, which is usually determined by supply and demand due to seasonality, weather expectations, etc. Futures prices can actually be lower than spot prices.



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