WHAT IT TAKES TO TRADE IN OIL FUTURES
On Earth, expect oil to remain the most significant energy source. No one – not even Warren Buffett – can underestimate the vital role of petroleum in our everyday life. According to the International Energy Agency, the world consumes more than 93 million of barrels of oil and liquid fuels per day, or over 34 billion barrels a year, and demand is growing and consistent. Given that, oil trades in a sophisticated market with several tools and instruments to invest or speculate in this commodity. Trading in oil futures is one way of speculating in oil prices.
In theory, oil futures contracts are simple. Some market participants sell risk to fellow traders who are willing to purchase it, hoping to generate profit. How? Buyers and sellers determine a price that oil will trade on coming date. Futures for oil settle monthly, unlike majority of agricultural commodities, making it easier for investors to pinpoint trends (or predict trends) in the oil’s future price.
For instance, oil trades at $25 a barrel, and they think it will be available at $45 a barrel 10 months from now. Based on that assumption, they speculate the price will climb to $65 a barrel by said date and purchase the $45 contract. Traders, if their prediction is right, can buy oil at $45 and sell it for a $15 profit. But if the contract becomes lower than $45, it becomes worthless. Players on the other side adhere to another saying: nothing ventured, nothing gained. The point is the commodity price in question is expected to sell for on the following date is referred to as the futures price, which can differ hugely from current price.
As of present, oil settles at $57.26 a barrel on the New York Mercantile Exchange. The latest available contract for December 2023 is at $68.08. Looking at these figures, can we foresee the future through oil futures? History shows projecting prices for 8 years forthcoming is a tricky move. How tricky is it? There are numerous infinite factors that can affect the oil’s eventual price. And unfortunately, our brains can only weigh on the obvious ones, such as the oil’s current price. Not to mention the market provides few guarantees.
What does a trader need to trade in oil futures? Patience, boldness, knowledge, and large capital. We are talking about thousands of barrels here, not just barrels. For example, the December 2023 contract is at $68.08 and you are betting on that. This can either make you earn (or set you back) $68,080. If you do not know the implications of that trade, do not venture in oil futures.
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