How Does Oil Futures Market Work ?
If you are wondering how does the oil futures market works, then will be surprised to learn that the contracts of oil futures are traded on exchanges. In the US, there are 2 exchanges where oil futures are traded. These are the NYMEX and New York Board of Trade. Here speculative trading of oil futures occurs. |
So, how does the oil futures market work? Basically, when a buyer feels that the price of oil is going to go up, he ends up buying contracts at the current price, which is low. If the price goes up as the buyer anticipated, he will sell the contracts and make a profit. On the other hand, if a futures holder anticipates that the price of oil is going to reduce compared to the contract price, he will sell the contracts he currently holds. (See Reference 1)
Oil futures are nothing by investment instruments wherein investors agree to buy a certain amount of oil at a certain price on a specific date. At times, it is possible trade the oil future right until the last day of the future. Usually, it is the investors who buy the futures on a margin. The entire price on the futures is not paid. Rather, the investors pay 2 to 10 percent of price stated on the contract. (See Reference 2)
This kind of trading occurs on speculation where investors make a prediction on the price of oil for several months or years. The trading of oil futures is not based on the current price of the oil. Rather, investors try to predict what the price will be in future. So, if an increase is anticipated, they purchase the contract at the current price to get a profit in the future. However, if their prediction is wrong and price of oil decreases, the investors end up making a loss. Typically, oil futures trading reaps a profit as oil prices are always increasing. The only thing that the investors do not know is by what amount the price of oil will increase. (See Reference 2)
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How Does Oil Futures Market Work
If you are interested in investing in Russian oil, you may be a little disappointed to learn that most of the large oil companies are owned by the state, and this can pose a problem for a potential investor. However, there are some exceptions, like the Russian Gazprom.