Bad as the economic impact of higher oil prices may be fog around their future path only makes things worse. People wonder, whether they could go higher? Will they fall? To get clarity, many observers consider the futures price of oil as quick and easy means to predict the direction of oil prices. In the end, this market where experts trade contracts on future oil deliveries. Unfortunately, futures prices do not predict well. Close examination of futures market can help us understand the forces affecting oil prices, but do not tell us much about where those prices are headed.
This economic commentary explains the basic work of the oil futures market and economic forces that set spot and futures prices for oil.

Crude oil futures

Until the end of 1970, oil prices were largely determined by long-term contracts between producers of oil and international oil companies. OPEC production 67 per cent of the free world crude oil, allowing it to dominate the price and quantity of oil sold. Prices fluctuated, when these long-term contracts have been revised, but prices were not particularly responsive to market conditions. Spot-market for immediate delivery markets were relatively minor, and accounted for only 10 per cent of international trade of crude oil.


However, oil market has begun to change, non-OPEC countries exceeded OPEC oil production for the first time in 1982. Owners of new oil from areas such as the North Sea, is not characteristic of long-term contracts with buyers, forcing them to seek other ways to build market share. They were able to achieve this goal on the spot market undermines OPEC. The buyers were attracted to prices that may vary as $ 8 per barrel lower than long-term contract prices. The strategy worked, and fundamental changes have occurred in the oil market. By the end of 1982, nearly half of all international oil markets traded in the spot market, but on the basis of long-term contracts. Even the major oil companies have begun Turning from long-term contracts, replacing them with the market price determined by agreements. Currently, prices are determined on a very short time, daily fluctuations in oil prices has become the norm. In order to hedge against fluctuations in the oil market daily, the participants began buying oil futures.

With oil in the future, the buyer agrees to buy oil on the prespecified price and quantity of a certain date in the future, expires. The agreement made today, but oil and payments are delivered in the future. This agreement removes the uncertainty and price risk for both buyer and seller. This insurance is a cost, however. If the actual spot price on the date of expiry of futures prices differ from one side regretted signing the contract. This party has the incentive to default on the agreement, either because he bought the oil above the current market price, or sold the oil below spot prices. In order to reduce credit risk, futures contracts are marked to market with a daily closing futures prices. This means that whenever the closing futures price goes up or down, gain or loss on credit-lifted to the appropriate party to the margin account. Participants must maintain a certain amount of funds (margin requirement) in that account.

By marking on the market daily and making sure participants maintain reserve requirements, credit risk is less than would be if the gains and losses have not been resolved prior to the expiration date. For some commodities, credit risk is further reduced by setting the ceiling on the amount prices could change any day, limiting the trader's immediate losses. This does not apply to oil, though; trade halted for five minutes, when the contract traded, bid, or offered for $ 10 above or below the original price.

Despite crude oil futures began trading on the New York Mercantile Exchange (NYMEX) in 1983, trade was relatively limited until 1985. Today, oil is the world's most actively exchanged goods from the "light sweet" crude most actively traded more than 161 different types. oil, which is a "light" has a low population density, and "sweet" means low sulphur content. These definitions of quality oil, or how much oil can be refined into gasoline. West Texas Intermediate (WTI) is very high quality crude oil, and therefore its price is usually higher than in other mixtures, such as Brent blend, which is less sweet and not light. WTI crude is a milestone in North and South America because of its high quality, since most und WTl is refined in the United States, where most of gasoline consumed.

When most of the major U.S. newspapers report spot prices for oil, they have in mind one month NYMEX futures prices. NYMEX oil future contract for 1000 barrels of internal light, sweet crude oil. To be included in the contract, oil must meet the specifications for sulphur content and density. Because WTl meets these standards, it often NYMEX contracts traded. Thus, one month NYMEX crude oil futures prices and spot prices WTl virtually identical. The exception is the end of the month, when the NYMEX futures contract expires three days before the spot WTI contract. Futures contracts traded during the 30 consecutive months, as well as long-term contracts 36.48, 60, 72 and 84 months before the birth.