How to Trade the Commodity Analysis

Commodities are driven by supply and demand fundamentals — inventories, production rates, and seasonal patterns. Unlike equities, which can defy gravity on sentiment alone, commodities eventually follow their physical fundamentals.

The three tradeable assets

WTI Crude Oil — Driven by global demand (economic activity), OPEC supply decisions, US shale production, and strategic reserve releases. The most macro-sensitive commodity.

Gold — Driven by real interest rates (when real rates fall, gold rises), dollar strength (inverse), and fear/uncertainty. Gold is both a commodity and a monetary asset.

Natural Gas (Henry Hub) — Highly seasonal. Driven by weather (heating demand in winter, cooling demand in summer), storage levels, and LNG export demand. The most volatile of the three.

Key fundamentals to watch

Weeks of supply — Crude stocks divided by refinery consumption. Below 25 weeks is tight (bullish oil). Above 30 is loose (bearish). This is the single most important oil fundamental.

Seasonal deviation — Are inventories above or below the 5-year average for this time of year? A +5% deviation means stocks are above seasonal norms (bearish), -5% means below (bullish). Oil has strong seasonal patterns — driving season drawdowns, winter builds.

4-week draw/build rate — Are inventories drawing down (bullish) or building up (bearish)? The direction matters more than the level.

CFTC positioning — Shows how speculators are positioned. Extreme net-long positioning means the trade is crowded and vulnerable to a reversal. Extreme net-short means the crowd is bearish and a squeeze is possible.

The best commodity trades happen when fundamentals and positioning diverge. If inventories are drawing but speculators are net-short, that's a setup for a powerful long squeeze.

How to read the recommendations

The system produces 0-3 trade recommendations. Zero is a valid output — it means no setup qualifies. Don't force a trade when the system says "pass."

Each recommendation includes entry zone, target, invalidation, and confidence. The R/R ratio (reward-risk ratio) tells you how much you stand to make versus how much you might lose. A 3:1 R/R means you could make 3x what you're risking. Below 2:1 is generally not worth it.

The macro asset views section shows the macro desk's conviction for oil and gold. The commodity AI can override the macro view if its specific data (inventories, positioning) is strong enough, but it must explain why. If you see the commodity AI at STRONG conviction but macro is only MODERATE — the commodity-specific data is doing the heavy lifting.

Gold-specific guidance

Gold trades differently from oil. It's less about inventory fundamentals and more about:

Real rates — When real rates fall (inflation rises faster than nominal rates), gold rallies. When real rates rise, gold suffers.
Dollar strength — Gold is priced in dollars. Dollar up = gold down, generally. Check the macro view on the dollar.
Geopolitical risk — Gold spikes on fear events. These spikes often fade once the acute fear passes — be cautious chasing gold after a geopolitical spike.
Central bank buying — A long-term structural tailwind. Not a trade signal, but context for why gold holds up better than models suggest.

Key terms you'll see

Contango — When futures prices are higher than spot prices. Common in oil. Costs you money if you hold ETFs that roll futures contracts.
Backwardation — When spot prices are higher than futures. Signals tight supply and is bullish for the underlying commodity.
COT Report — The Commitments of Traders report. Published weekly by the CFTC. Shows speculative vs commercial positioning.
Breakeven Inflation — Relevant for gold: rising breakevens support gold because they imply falling real rates.

What NOT to do

Don't fight the trend in oil. If the 4-week draw/build rate says builds and WTI is below its 20-day SMA, the trend is down. Trying to catch the bottom is expensive.

Don't trade natural gas without understanding its volatility. NatGas can move 5-10% in a day on a weather forecast change. Size positions 50% smaller than you would for oil or gold.

Don't double down on losing commodity positions. If the system flagged a double-down, it will explicitly say so with "DOUBLE DOWN" in the reasoning and explain why. Otherwise, don't add to a losing trade.

Don't ignore the macro context for gold. A gold long when the macro desk says "dollar strengthening, real rates rising" is fighting two headwinds. The commodity-specific setup needs to be exceptional to overcome that.

Don't hold commodity positions through expiry without understanding contango/backwardation. If you're using futures or ETFs that roll, the roll cost can eat your profits.

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