Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current price of a spot contract, at which a particular commodity could be bought or sold at a specified place for immediate delivery and payment on the spot date. Conversely, a commodity's futures price is quoted for a financial transaction that will occur on a future date and is the settlement price of the futures contract.

Key Takeaways

  • The spot price of a commodity is the current cash price for the physical good in the market.
  • The futures price is based on a derivative contract for delivery at a future date in time.
  • The difference between spot and futures prices in the market is called the basis.

Differences Between Commodity Spot and Futures Prices

The main differences between commodity spot and futures prices are the delivery dates and prices.

A commodity's spot price is the price at which the commodity could be traded at any given time in the marketplace. In contrast, a commodity's futures price is the price of the commodity in relation to its current spot price, time until delivery, risk-free interest rate and storage costs at a future date.

Calculate commodity futures prices by adding storage costs to the spot price of a particular commodity. Multiply the resulting value by Euler's number (2.718281828…) raised to the risk-free interest rate multiplied by the time to maturity. Generally, futures prices and spot prices are different because the market is always forward-looking. The difference in a commodity's spot price and the future price is due to the cost of carry and interest rates.

For example, assume the spot price of gold is $1,200 per ounce and it costs $5 per ounce to store the gold for six months. The six-month futures contract on gold, given a risk-free interest rate of 0.25%, is $1,206.51, or (($1,200+$5)*e^(0.0025*0.5)).

Spot Price, Futures Price, and Basis

The basis is the variation between the spot price of a deliverable commodity and the relative price of the futures contract for the same actual that has the shortest duration until maturity. Basis is a crucial concept for portfolio managers and traders because this relationship between cash and futures prices affects the value of the contracts used in hedging. As there are gaps between spot and relative price until the expiry of the nearest contract, the basis is not necessarily accurate.

In addition to the deviations created because of the time gap between the expiry of the futures contract and the spot commodity, product quality, location of delivery and the actuals may also vary. In general, the basis is used by investors to gauge the profitability of delivery of cash or the actual and is also used to search for arbitrage opportunities.

As an example for basis in futures contracts, assume the spot price for crude oil is $50 per barrel and the futures price for crude oil deliverable in two months' time is $54. The basis is $4, or $54 - $50.

Advisor Insight

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 the 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.