The importance of the spot market
The cash market (also called the spot market), where assets are traded for instantaneous delivery and settlement on value date (D+2 for example in foreign exchange markets), is usually contrasted with the derivatives market, where there is a difference between the trade date and the settlement date.
One of the constraints of the cash market is the fact that the investor who must deliver the traded assets must hold the assets necessary for the settlement of the orders placed so that the transaction can take place on the value date. This can be problematic especially in commodity markets where delivery is physical and the delivery location is a specific geographic point.
The chicken or the egg?
The question usually asked, and which rarely finds a universally satisfactory answer, is to know which is the leading market: is it the flow-cash (i.e. the need for immediate assets) that influences the derivatives markets or rather the derivatives (i.e. the expectations of the movement of securities until a certain maturity date) that move the cash prices?
The answer is not necessarily unequivocal and requires further analysis. One could say that depending on the underlying asset, it is the cash flow that influences or is influenced by the derivative flow.
For example, commodities are a very special case due to their specific characteristics as a consumer asset market. Thus, the movements in oil in April 2020, where the near-immediate delivery contracts saw negative prices for the first time in history, did not necessarily move the futures price of oil. Indeed, the reality of the moment for this type of commodity market (a poor harvest, bad weather conditions, a fall in cyclical demand, storage capacities almost at their maximum capacity, etc.) does not necessarily augur well for the future. ) do not necessarily mean that these conditions will continue.
On the other hand, in markets where futures prices are deducted from cash prices by a simple mathematical process resulting from a cash and carry, it will often be the cash flow that drives the price movements of derivatives.