What is an Oil Futures Market?

A. Leverkuhn

An oil futures market is one of many markets structured around commodities. Commodities are physical goods that can be traded in a variety of ways. Commodity markets began as a way to secure future prices for producers delivering the physical materials, but now speculation and sophisticated value investment dominate the commodities markets.

A drill rig is used to drill for oil.
A drill rig is used to drill for oil.

Finance professionals refer to an oil futures market as a market geared toward the buying and selling of futures contracts for oil. Futures contracts are agreements that fix a price for future delivery of a commodity. Oil is a commodity, whether it is crude or refined. Buyers and sellers of oil futures agree to a fixed price. The goal of speculation on oil futures is to benefit from a rise or decrease in the price between the time that the oil future contract is agreed on and the time that the contract is “settled.”

Investors in the oil futures market should stay abreast of any events that have affected oil transportation routes, such as a naval blockade or regulations that inhibit the movement of oil tankers.
Investors in the oil futures market should stay abreast of any events that have affected oil transportation routes, such as a naval blockade or regulations that inhibit the movement of oil tankers.

The settlement for a futures contract works in two ways: through physical delivery to a buyer, or through a cash settlement that represents the agreed delivery. Some call the settlement time “expiration” because the futures contract is no longer traded after that time. Traders hope to profit at expiration or settlement of a futures contract due to a projected change in price.

Oil futures markets vary. Specific oil futures market opportunities exist for crude oil, where global distribution is often a key element of these price speculations. Refined oil has its own futures contracts, as does heating oil and other specific petroleum products. All of these are carefully tracked by investors as physical commodities that are valuable for daily use. Oil futures also vary according to different “grades” of oil based on factors like viscosity and sulfur content.

Those involved in looking at oil futures will probably keep an eye on all of the news coming out of global markets about oil producers, such as OPEC or other consortiums. The general demand for oil will also be a very relevant factor. Political turmoil can sometimes affect the price of oil. Speculators can at times “drive up” the market for oil, which also contributes to volatility for this commodity.

Commodity futures, including oil futures, are often traded through specific commodities markets. Traders can get more information on specific oil futures market opportunities from exchanges that support this kind of trading. Individual investors will often need brokers to pursue these opportunities on their behalf. Some will choose to be involved passively through funds or other financial products.

Crude oil has its own futures market.
Crude oil has its own futures market.

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