What Is Crude Oil Futures Contract

Even if you never trade futures yourself, keep in mind that all the energy companies you invest in are likely to use futures contracts for their own account. So, understanding how crude oil futures work can give you a good overview of how corporate stock prices should react to changes in oil prices. For example, a producer who has already sold futures contracts on most of its future production should not react much when oil prices change. However, those who do not participate in futures markets are largely unsecured and can see a lot of volatility when oil prices move sharply. There are two major oil contracts that are of most interest to players in the oil market. In North America, the benchmark for oil futures is West Texas Intermediate (WTI) crude oil, which is traded on the New York Mercantile Exchange (NYMEX). In Europe, Africa and the Middle East, the benchmark is North Sea Crude Brent, which is traded on the Intercontinental Exchange (ICE). While the two contracts move somewhat in unison, WTI is more sensitive to economic development in America. and Brent reacts more to those overseas. Crude oil futures can be higher, lower or equal to spot prices. The price difference between the spot market and the futures market says a lot about the general state of the oil market and its expectations. If futures prices are higher than spot prices, it usually means that buyers expect the market to improve, so they are willing to pay a premium for the oil to be delivered at a later date. If futures prices are lower than spot prices, it means that buyers expect the market to deteriorate.

While oil importers and exporters use futures contracts to insure against the negative effects of oil price volatility, traders can use them to speculate on oil without buying or selling the commodity itself. This is because oil futures prices will move as the value of oil rises or falls. Crude oil is one of the most actively traded commodities in the world, and its price affects that of many other commodities, including gasoline and natural gas. However, the ripple effect of crude oil prices also affects the prices of stocks, bonds and currencies around the world. It remains an important source of energy for the world, despite the increased interest in the renewable energy sector. An oil futures contract is an agreement to buy or sell a certain number of barrels of oil at a predetermined price at a predetermined date. When futures contracts are purchased, a contract is signed between the buyer and seller and secured by a margin payment that covers a percentage of the total contract value. Oil end users buy on the futures market to get a price; Investors buy futures contracts to bet essentially on the real price level and profit from it by guessing correctly. As a rule, they liquidate or renew their forward assets before they have to accept the delivery. There are three main ways to speculate on oil price movements: futures and options, CFD trading, or investing via stocks and ETFs. CFDs allow you to trade on the changing prices of futures and options, but without buying and selling the contracts themselves.

And instead of trading on a commodity exchange, create an account with a leveraged supplier. This brings several advantages for oil traders: crude oil is one of the best commodities to trade a futures contract, as the market is incredibly active and known to traders around the world. Oil prices fluctuate due to the slightest murmur of price news, making it a favorite of swings and day traders looking for an advantage. This volatile environment can offer solid trading opportunities, whether you focus on day trading futures or longer-term trading. It can also lead to significant losses if you are on the wrong side of a price movement. Crude oil futures on the New York Mercantile Exchange (NYMEX) are the world`s most actively traded futures contract on a physical commodity. Due to its excellent liquidity and price transparency, the contract is used as the most important international price reference. NYMEX also offers trading of heating oil futures and gasoline futures. When tracking price movements and making trades, keep in mind that lead-free gas and furnace oil prices can affect the price of crude oil. Demand is usually highest during the summer and winter months, but for different reasons.

During the summer, increased momentum boosts demand for crude oil and drives up prices. .