BALANCE AND MARKET EQUILIBRIUM

In a perfectly balanced market, supply and demand of a particular commodity would be in equilibrium. Commercial producers’ output of a particular commodity would be just enough to meet commercial consumers’ demand. Prices would be stable. In the real world, however, the market gets out of balance due to disruptions in supply or demand, and prices become unstable, rising or falling depending on market conditions.

As this price action begins to unfold, speculators come into the market, buying or selling depending on the perceived imbalance, which may cause prices to rise or fall further. Eventually, this activity will help bring the market back into balance, because prices will either rise high enough to generate additional production (thus easing supply shortages), or they will fall far enough to generate additional demand or curtail production.

This ebb and flow in the fundamentals can be seen with careful study of the COT data as it relates the activity over time. Because it reveals what large commercial players—the key producers and consumers in the underlying physical commodity—are doing, it is essential to understanding the dynamics of a particular market.
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