Energy prices are crucial for all people, and the plunge in crude oil prices has important changes in the value of certain key commodities for consumers and investors.
But, on the side of investors, there is a lot more to consider than the oil price today. Crude oil futures give you the opportunity to profit from fluctuations in the barrel price, but they operate a lot more differently than merely buying oil and gas company stocks.
Crude oil futures are futures contracts in which buyers and sellers of oil coordinate and agree to deliver particular amounts of physical crude oil on a given date in the future.
An oil futures contract is the agreement to buy and sell a particular amount of barrels of oil at a predetermined rate on a pre-decided date. When futures are bought, a contract is signed with the buyer and the seller and secured with a margin payment that covers a per cent of the total value of that contract.
End-users of oil purchase on the futures market in order to lock a price; investors buy the futures as a gamble on what the price would actually be in the future. They profit if what they had guessed was right. Typically, they would liquidate or roll over their futures holdings before they would have to take the delivery.
There are two major oil contracts that are watched by the oil market participants. North America's benchmark for oil futures is West Texas Intermediate crude, which trades on the New York Mercantile Exchange. In Europe, Africa, and the Middle East - the benchmark is the North Sea Brent Crude that trades on the Intercontinental Exchange.
Since there are multiple futures contracts open at once, most of the trading revolves around the front-month contract. For this very reason, it is known to be the most active contract.
Oil futures contracts are simple; they continue the time-honoured practices of particular participants in the market selling risk to the others that gladly buy it in the hopes of making money. The buyers and sellers establish a price that oil will trade at not today - but on some coming date. While no one is aware of what price oil will be trading at nine months from now, players in the future market believe they could.
Unlike agricultural commodities, futures for oil settle monthly. Other futures contracts would settle only four times a year. The regular frequency of oil futures makes it simpler for the investors to understand trends or expected trends - in the eventual price of oil.
There are various reasons why you need to invest in oil futures, and here are some of the benefits that you can look forward to:
There are certain ways to buy crude oil futures, and some of the most common ones are:
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