Facts on Oil Futures
Oil futures are standardized contracts for the future delivery of a specific amount of crude oil on a preset date. The futures contracts trade on organized commodity exchanges. The prices of oil futures contracts are widely published and provide a snapshot of the current price of a barrel of crude and what traders think it will be worth in the coming months.
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Standardized Contracts
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The West Texas Intermediate Light Sweet Crude is the most widely followed crude oil contract. Each futures contract is for the delivery of 1,000 barrels of crude oil to Cushing, Okla. Contracts trade for delivery up to nine years in the future. Contract settlement is every month out for five years, then June and December for the nine-year forward contract. The near-month contract price is the most widely quoted and closely tracks the spot price of crude oil.
Other Crude Oil Futures
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The West Texas Intermediate futures price is the one most often publicized, but futures contracts trade for the delivery of several sources of oil. Prominent crude oil futures include Brent Crude, Russian Export Blend Crude Oil and Gulf Coast Sour Crude Oil. Financial oil futures contracts have cash settlement of the contract value and do not include the delivery of crude oil. These futures can be used to hedge the future price of oil, possibly by airlines or shipping companies.
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Futures Trading
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Crude oil futures trade on the floors of different commodity exchanges and electronically over the CME Globex system. Electronic trading of oil futures takes place almost around the clock. Trading starts at 6 p.m. Eastern time on Sunday and continues until 5:15 p.m. on Friday. Trading stops at 5:15 p.m. each day for 45 minutes. The nearly 24-hour trading cycle allows traders to react to news affecting oil prices whenever it happens.
Individual Traders
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Individuals who want to trade oil futures contracts must open an account with a broker registered with the Commodity Futures Trading Commission (CFTC). A futures trade can be opened with either a buy order to profit from rising crude oil prices or a sell order to gain from falling oil values. The opposite trade closes out the position. The trader must make a margin deposit for each crude oil contract traded. In February 2011, the crude oil initial margin was $5,063 for the West Texas Intermediate contract. The oil futures contract gains or loses $10 for each one cent change in the price of oil.
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References
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