What does Commodity Swap mean?
A swap where there is an exchange of cash flows for an underlying commodity. In this contract a buyer or seller enters into a contract in which they sell or buy that commodity at a future date at a predetermined price. This protects the buyer or seller from any price movement which might happen in the future. The nature and objective of a Commodity swap is similar to a floating and fixed interest rate swap.
Futures Knowledge Explains Commodity Swap
For example commodity swap is widely used by oil producers. Oil is a very volatile commodity. If an oil exploration company knows that it would be able to produce X amount of oil in next few months from its oil field, then in order to lock in the revenue it enters into a commodity swap contract in which it would sell oil in coming months at a fixed price. This brings predictability in its future cash flow.