Oil is an extremely important source of energy for modern economies, even for the least developed ones. There is no other substance that provides more energy per unit for the cost of extraction. It is believed that abundant and proven oil will remain the most popular source of energy on Earth for some time to come.
The Importance of Trading Oil Futures
With the International Energy Agency’s 2020 forecast that total oil consumption will reach 91.9 million barrels per day, oil is traded in a sophisticated market that has many tools and vehicles for investing in or speculating on oil.
How Do Oil Futures Contracts Work?
Oil futures contracts are simple in theory. They continue the practice known to some market participants who sell risk to others who happily buy it in hopes of making money. For example, buyers and sellers determine a price at which oil (or soybeans or gold) will be traded not today, but at a future date. Although no one knows the price of oil that will be traded nine months from now, players in the futures market believe they can.
Can the Future Be Predicted Through Futures Contracts?
In October 2020, the futures contracts for the next month – November 2020 – were selling at $40.25. The following month – December 2020 – at $40.53; January 2021 at $40.88; February 2021 at $40.22; and at some point two years from now, oil prices (or at least, the predicted oil prices as indicated by futures contract levels) are expected to reach $43.46 per barrel. The increases do not stop here. After two years, oil futures contracts are settled less frequently on a monthly or even yearly basis. The latest available contract, for the year 2031, is sold at $50.34.
Conclusion
To trade oil futures contracts, you need two qualities that are often contradictory: patience and boldness. You also need substantial capital to start. Oil futures contracts are not measured in barrels, but in thousands of barrels. A December 2031 contract will cost you $50,670, but it will give you a liquid asset whose value will change between now and when it matures. This means plenty of time to achieve a potential profit, or to wait and wonder if you made a foolish decision. In any case, trading oil futures contracts is not for amateurs.
Source: https://www.investopedia.com/articles/active-trading/040615/introduction-trading-oil-futures.asp
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