Many of the world’s motorists may well remember the first signs of price volatility in the market for gasoline. Prices at gas stations skyrocketed in 1973 after the Yom Kippur War, and once again in 1979 when further supply disruptions occurred. There were, at the time, controls on the allocation and the price of gasoline, but these controls were removed in 1981. Soon after this event, the first gasoline futures were introduced on the New York Mercantile Exchange (NYMEX).
Futures contracts are one of the ways that are used to manage price risk in the financial markets. The purpose of futures contracts is to help avoid surprises because of price volatility when it comes to commonly used commodities. All commodity futures are contracts to deliver a certain amount of a certain product at a particular date in the future. Gas futures are contracts for the delivery of gasoline in a given month in the future, at a certain price.
Gas futures are traded in terms of the month in which the delivery will take place. For example, in November, trading can take place with contracts for the December delivery of gasoline, or for delivery in any month up to 12 months thereafter. At the close of the last business day in November, the trading of December contracts terminates. One NYMEX unleaded gasoline futures contract represents the delivery of 1,000 barrels of gasoline at New York Harbor. This harbor is a busy center for the distribution of imported and exported supplies, and thanks to a complex network of pipelines, it is connected to large refining centers on the Gulf Coast and other essential market centers.
There are two main groups of people who can benefit from the purchase and sale of gas futures: speculators and commercial users of gasoline. Speculators fulfill vital functions in the market for gasoline by first providing “liquidity,” meaning that the volume of their transactions makes it easy for others to buy and sell gas futures at a given time. They also take on risk in the hope of making a profit.
If it were not for the risk-taking speculators in the market, it would be much more difficult for commercial users to agree on a price, which would short-circuit the activity of the market. The commercial users of gas, such as someone operating a fleet of vehicles, are interested in the actual physical delivery of the gas, and the speculators ensure that the market in gas futures can fulfill its purposes uninterrupted.