What you will learn
- Define a spot price in terms of grade, location and delivery.
- Show how low inventories and slow demand response amplify price moves.
What the spot price refers to
A commodity is a standardized, interchangeable good such as crude oil, copper or wheat. The spot price is the price for delivery now or within days, for a specific grade, location and set of delivery terms.
Because goods must be physically moved, spot prices differ between places. The price at one hub is not the price at a port a thousand kilometers away, and the gap reflects transport, storage and local conditions.
Supply, demand and inventories
Supply depends on production, weather, disruptions and policy; demand on industrial activity, seasonal use and income. Inventories connect the two: stocks are a buffer, drawn down when supply is short and rebuilt when it is plentiful.
In the short run, supply and demand both respond slowly to price, because mines, wells and farms take time to expand and consumers cannot switch quickly. A small imbalance can therefore need a large price move to clear.
Seasonality and shocks
Agricultural prices follow planting and harvest cycles, and energy demand rises with heating or cooling needs. Seasonal patterns are largely anticipated in prices, so their existence alone does not create predictable gains.
Shocks such as drought, strikes, outages or export limits change supply suddenly. The effect is larger when inventories are low, which is why analysts watch stocks relative to use.
Worked example: A shortfall in an inelastic market
Suppose short-run demand for a fictional grain falls only 0.25% for each 1% rise in price. A 5% supply shortfall with no stock drawdown needs a price rise of about 5 ÷ 0.25 = 20% to cut consumption by 5%. Drawing down stocks can bridge such a gap and soften the price effect, but the buffer is finite.
Check your understanding
A fictional metal has stocks of 24 thousand tonnes and use of 12 thousand tonnes a month. How many months of cover is that, and how long would stocks last if supply fell short by 3 thousand tonnes a month?
Show answer and explanation
Cover is 24 ÷ 12 = 2 months of use. A 3 thousand-tonne monthly shortfall draws stocks down at that rate, so they last 24 ÷ 3 = 8 months if use stays unchanged. In practice prices would rise sooner to curb demand and attract supply.