Oil prices have been historically volatile, and the recent surges in the price of oil have been effecting consumers across the world. As the price of oil rises investors in oil futures stand to make huge profits by using oil futures contracts. You may be wondering, what are oil futures?
Oil futures are financial instruments that carry with them legally binding obligations between buyers of a commodity – in this case oil – and sellers of a commodity. Sellers and buyers of the oil futures contracts have the obligation to make or take delivery of an underlying instrument at a preset settlement date in the future.
As oil futures prices are derived from the underlying instrument, these investment vehicles are often referred to as “derivatives”, and settlement dates, quantity, and quality of these contracts is standardized. There are futures markets for a variety of instruments ranging across commodities, interest rates, equities, bonds, and currencies.
Oil futures are traded on the Intercontinental Exchange as well as the NYMEX, or the New York Mercantile Exchange. Light-sweet crude oil is traded on these exchanges, and a single contract – or “lot” – calls for the sale or purchase of 1,000 barrels of oil.
What Are Oil Futures And Who Invests In These Instruments?
What are oil futures and who are the primary investors? Participants on futures exchanges include corporations that may have an interest in oil futures for their daily business. Some examples include transportation companies, utility companies, and airlines. This strategy offers these companies the chance to hedge against losses that could arise from rising oil prices.
Another class of oil futures investors are speculators, which are usually banks and other financial institutions with an opinion on where oil prices are headed. These financial institutions assume the risk and provide the market with liquidity.
There has been much conjecture as to whether this speculation has resulted in the volatility seen in the price of oil. While the volatility seen in oil prices seems to be a combination of factors, including political and global events, speculation has certainly affected at least the short-term price fluctuations in crude oil.
What Are Oil Futures And How Are They Traded?
Oil futures contracts are traded on regulated futures exchanges, and trading can take place through open outcry or through electronic trading systems or a combination of both. You must be a member of that exchange in order to trade on it.
A member of an exchange can either trade on their own account, or they can execute orders for speculators or hedgers. If an exchange member is acting as a broker, they can then collect a fee for their service.
In order to limit these brokerage fees and commissions, you can use a discount broker such as ETrade, that also offers a range of included services, including personalized investment advice. This online broker also offers over 200 futures investment products to make it easier for you to find the futures investment that is best for you.
There is also a clearinghouse for each exchange that ensures that trades are executes according to market rules, and also guarantees the performance of the contracts traded.
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