Commodities trade at the margin, because there are many times more futures contracts than actual deliveries, but the people that actually take delivery and need these commodities to run their operations, will pay whatever price necessary to get them and not stop production. The effect of this is to make the markets extremely volatile.
The last sentence is not true. The whole point of a futures contract is to hedge risk and allow price discovery. It is true the companies consuming commodities will buy at almost any price but more active trading results in a price more closer to fair market value over time. It’s the same reason why prices for rarely sold items fluctuate widely between sales. There’s no activity to visibly show the change in demand or supply in between.
Is that so? In theory, derivatives like futures can increase the efficiency of market clearing. Nevertheless, it is apparent that the price of oil is many times more volatile than the price of downstream finished goods using oil.
Yes and it's precisely because futures and forward contracts are being used that is possible. If it wasn't then market uncertainty and fluctuations in the economy would be more instantly reflected in prices of the end user products consuming those commodities. With hedging now you can focus on margin and operations which is the whole point of your business, not predicting the global economy.
