What a New Generation of Traders in Commodities Might Mean For Markets

• The US president's War on Iran has opened the door to a new generation of commodity “traders” via predictive market websites. 

• Two of the commodities mentioned in a recent story were natural gas and wheat. Yes, you read that correctly. 

• The ripple effects on reads of real fundamentals for these, and other, weather derivative markets turned into meme stocks are expected to be dramatic. 

My friend and Barchart coworker Elizabeth Volk sent me a story from Barrons Wednesday morning titled, “Kalshi to Add More Commodity Markets as Global Turmoil Drives Retail Trading”. The subject line on Elizabeth’s email read, “thought of you…”, and it took only one paragraph for me to see why. I had to stop reading for a moment my eyes filled with tears from a sudden burst of uncontrollable laughter. The author of the piece, Nick Devor, had written, “Prediction market traders (Traders? Right.) are getting into commodities as the war in the Middle East roils oil markets and global supply shocks keep grocery prices volatile. To meet the moment, leading U.S. prediction market Kalshi is adding new markets for commodities like natural gas (NGK26) and wheat (ZWK26). 

Sorry. I started laughing again as I typed that quote. Let me paint this picture for you: Prediction market “traders”, folks who have no idea of what they are dealing with, are going to jump into the two most psychotic commodity markets since pork bellies walked away a few decades ago. The two markets are also known as The Widow Maker (natural gas) and Poverty Grass (wheat), nicknames that are not only well-earned but good descriptions. In fact, if these “traders” wanted to complete the Terrible Trifecta, they jump into Bitcoin (BTCUSD) as well. I thought of the piece I wrote for Barchart back in 2022 when I read the latest article. My conclusion back then was if I had to choose to trade Bitcoin or natural gas, it would be the latter. Unwillingly, of course. 

I’m also reminded of a story the late Gary Wilhelmi used to tell me about the Oat pit. Gary was a long-time floor reporter at both the Chicago Board of Trade and old Chicago Mercantile Exchange. He had seen and heard it all, along with knowing major characters in the industry’s history. Gary’s story to me was the oat pit was run by one of the meanest old men in the business. Keep in mind this is Chicago, so that’s saying something. Anyway, this man and his cohorts waited for those who didn’t understand how the oat trade worked to enter the market, then ate them alive. I always thought of fat, young calves wandering into a piranha filled river. The only thing that makes it to the other side might be a few bones floating by. 

I don’t think this will happen now given how markets are driven by algorithms being fed headlines generated by government officials and media outlets. It makes sense for predictive market sites to bring “traders” into the game. After all, that’s what markets have become, nothing more than a game. There is no such thing as true price discovery based on supply and demand, in fact I’ve argued that fundamental analysis has gone the way of technical analysis meaning it is generally useless. I don’t guarantee much, but I’ll come close to saying the commodity “traders” using Kalshi and other sites won’t care anymore about market fundamentals than the meme stock traders that shook the industry with spike rallies in GameStop, AMC, etc.

Which is just what markets like natural gas and wheat need – more volatility created just for the sport of it. I can’t help but think of the storm system that will be created when these two commodities, still considered weather derivatives, run up against a real weather event, either threatening a short supply situation or creating a bumper crop (wheat) or ample supplies (mild winter in natural gas). How will real markets, like natural gas and wheat, sort this situation out? 

I recently wrote about the importance of basis – the price difference between the cash/spot market and futures - in understanding real fundamentals in commodities. Let’s start with wheat, with the most likely market to attract predictive market “trader” money being the world’s largest wheat futures market – SRW. The seasonal chart for the Barchart US SRW Wheat Index shows the market is already running below previous 5-year and 10-year daily averages, meaning the commercial side of the SRW market do not feel the need to push the cash market in relation to futures to source supplies to meet demand. The latest Index figure is roughly 55.0 cents under the nearby futures contract. If I recall correctly, back in 2008 when the futures market exploded to a February settlement near $20.29, the National SRW Index was priced at $9.98 putting national average basis at $10.31 under the futures market. Think for a moment what that did to the industry. The wheat market was broken. End of story. I could see the same thing happening with the next generation of meme traders via predictive market sites. 

As for natural gas, the spot-futures spread has ranged from a 73.0 cent contango last October to a backwardation of $3.134 in late January. As I talked about in a recent piece on forward curves in the Energies sector, natural gas is difficult now to get a read on real fundamentals. Imagine what it will be like when commercial interests have to deal with hordes of unknowing “traders”. One investment manager, after reading my previous piece, sent me a message that read, “I never realized how ridiculous the natural gas forward curve is”. 

In the coming months, with summer weather and hurricane season ahead of us, we’ll long for these days when The Widow Maker and Poverty Grass made sense. As for this new generation of meme traders, I'll leave you with Lucius Fox's words of advice from The Dark Knight, “Let me get this straight. You think your client, one of the wealthiest, most powerful men in the world, is secretly a vigilante who spends his nights beating criminals to a pulp with his bare hands; and your plan, is to blackmail this person? Good luck.”

Good luck, indeed.