Definition of Oil Futures
An oil future is an investment instrument used to speculate on whether the price of oil will rise or fall. Technically, the term "oil future" refers to a "future contract" whose holder agrees to buy oil at a prearranged date in the future at a price that's agreed upon today. Trading in oil futures is closely watched not just by oil traders themselves but also by investors throughout the financial markets, because futures prices are a good indication of the future price of oil, and the price of oil has a huge impact on the economy.
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Futures Exchanges
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Oil futures are traded on regulated exchanges such as the New York Mercantile Exchange, or NYMEX. The exchanges set standards for future contracts, governing the quantity and quality of oil each type of contract refers to and when and where the oil must be delivered. This makes it easier for traders to determine the value of each contract, allowing for publicly quoted prices for future contracts and making it easier to match buyers and sellers.
Light Sweet Crude
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The most actively traded oil future contract is the NYMEX light sweet crude oil future. The term "light sweet crude oil" refers to a type of oil with low sulfur content. Light sweet crude is preferred by many oil refiners because it produces high yields of products such as gasoline, diesel fuel and heating oil, according to the NYMEX. The standard NYMEX futures contract for light sweet crude oil trades in quantities of 1,000 barrels of oil.
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Other Types of Oil Futures
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Other common oil future contracts include the Brent blend future contract, which is based on the value of light sweet crude oil produced from the oil wells of the North Sea, according to the NYMEX. Other grades of oil whose future contracts are traded include Dubai crude oil and Russian Export Blend Crude Oil.
Recent Prices
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Oil futures prices rose to record highs in 2008, contributing to high gasoline prices that cut into consumer spending and contributed to the recession. Most observers said the high prices were caused by rising demand from China and other large countries with fast-growing economies. But some observers and government policymakers claimed that speculation in the futures markets exacerbated the rise in oil prices.
Regulation
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The oil futures market is regulated in the United States by the Commodity Futures Trading Commission. President Barack Obama and House Speaker Nancy Pelosi have criticized the CFTC, saying that the lack of transparency in the oil future market has allowed too much speculation, which contributes to drastic swings in the price of oil.
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