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What are Oil Futures

30 Jun 2023

Introduction

  • Once popularly known as 'black gold', oil is an indispensable resource. Valuable and sought-after, oil is a vital asset with a constantly rising demand.
  • This is where oil futures come in; they are financial contracts to buy or sell a specific amount of crude oil on a specified date.
  • Traded on exchanges, they are derivatives instruments that allow traders to speculate about the prices of oil in the future.
  • Benchmark crude oils, such as Brent Crude or West Texas Intermediate Crude, are most actively traded as oil futures contracts. 

How Do Oil Futures Contracts Function?

  • Oil futures contracts work pretty much the same as other futures contracts. Herein, we have the original owner of the asset and the trader.
  • The original owner estimates that the price of his current commodity will rise to a certain amount, say, X. The trader agrees to purchase the contract on the commodity at X in the present, even though the current price of the commodity may be less than X. The trader expects that the price of the commodity will rise above X in the near future. If that happens, the trader will greatly profit from the trade; otherwise, he incurs a loss.

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Why Do People Invest in Oil Futures?

  • Oil is a non-renewable resource, which means that it has a limited supply, and at the same time, the world has an increasing demand for energy resources.
  • Hence, investors speculate on the ever-changing prices of oil in light of constant demand and supply. This, in turn, prompts traders to hedge against oil price movements.
  • Therefore, bullish investors have a great interest in investing in oil futures. Oil prices are affected by various factors, including the global demand-supply equation and decisions made by OPEC or non-OPEC nations. However, it is still a risky and capital-intensive investment. 
  • Sellers engage in oil futures to secure a definite profit. In the case of a price dip, it doesn't affect them much.
  • Oil futures also help diversify a portfolio. Some investors, especially bullish ones, perceive oil futures as a security against inflation since they expect oil prices to rise with it. 

What are the Factors That Influence Oil Prices?

While it is not possible to predict the exact trajectory of oil prices, we can look at a few factors that influence them to a great extent. Understanding the movements of oil prices can give us some insight into price fluctuations. Some of these factors are: 

  1. The impact of OPEC: The Organisation of Petroleum Exporting Countries (OPEC) is an alliance of countries that make up a large share of the global supply of oil. They can greatly influence oil prices by controlling the output. 
  2. Global economic conditions: While the economy is on an upswing, the prices of oil will rise since industry and machinery will make use of it. On the flip side, in the event of a recession, oil demand will plummet. 

Conclusion

  • On the whole, the prices of oil remain in constant flux, making it a lucrative asset to trade or invest in.
  • Investing in oil futures requires an understanding of the supply-to-demand equation and factors, including the movements of global powers like OPEC.
  • Large firms, oil companies, and refineries are often engaged in oil trading.
  • However, it can be risky to enter the market for futures and options without proper preparation and research.
  • Even with all the tools at your disposal, the price of black gold is like that of a turbulent sea, going up or down rapidly.

 

Related Articles: How to Make Money In F&O Trading | Know About Future & Options Span Margin Calculator | Index Futures Unveiled Exploring the Basics and Benefits

 

 

 

 

 

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