Understanding Oil Futures
The price of oil futures is widely quoted in the financial news to show changes in the cost of oil and energy. Changing oil prices affects the cost of gasoline, diesel fuel and the other products produced from petroleum. The oil futures market brings together buyers and sellers of crude oil with standard contracts for the delivery of specified amounts of oil on a future date.
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Futures Markets
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The commodity and futures markets are organized exchanges where standardized contracts on a wide range of commodities are traded. The term futures comes from the fact that the contracts are for the future delivery of the underlying commodity. A business that needs a certain quantity of oil in the future can buy futures contracts to ensure delivery at the current price. Oil producers can sell futures contracts to have buyers lined up for their product at a predetermined price. Traders buy and sell contracts to make profits from short-term changes in the price of oil.
Futures and Oil Prices
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The near-term futures contract expires in 30 days or less and closely tracks the value of spot oil. The spot price is what the buyer who needs oil right now pays. Oil futures prices are widely available and are used by the news media as a proxy for the current price of oil. The high level of trading and liquidity in the futures market allows the oil futures price to change very quickly in response to any event that could affect oil prices.
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Oil Futures Contracts
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There are oil futures contracts that trade on oil prices from different oil-producing regions and with delivery dates from one month to seven years in the future. The most widely followed oil futures is the West Texas Intermediate contract, with a delivery in the next month. This oil futures trades is on the NYMEX exchange and each contract is for 1,000 barrels or 42,000 gallons of oil. This futures contract may be referred as the light, sweet crude futures or the West Texas Intermediate futures contract.
Trading Oil Futures
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Traders who want to take positions on the price changes in oil can do so through a futures trading account with a registered commodity broker. Futures trading offers significant leverage to profit from small changes in the price of oil. A trader must put up a margin deposit for each contract he trades. In November 2010, the margin requirement for the standard oil contract was $5,063. On this deposit amount, a $1 change in the price of oil would be a $1,000 profit or loss.
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References
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