Commodities are not always produced close to where there is demand. Physical traders act as distributors, supplying customers and moving products around the world. Most of the world’s oil is produced in the Middle East, whilst most of the demand is in Asia.
The balance between supply and demand in energy and commodity products can be affected by many factors. In the longer term, demand trends are driven by economic conditions, technological advances or changes in government policy.
In the short term, weather or political unrest can affect the balance between demand and supply, and leave commodities producers, processors or distributors with too much or not enough product.
In addition to long term supply arrangements with customers – ensuring industrial customers have a steady supply of product they need to continue with the smooth day-to-day running of their operations – physical commodity trading firms seek to identify and address short term market imbalances.