Interested in futures trading and what it means in relation to cheap oil?
At the time this article was written oil was selling for about $50 dollars a barrel. Only a few months earlier, however, it was selling for more than $100 dollars a barrel! When market prices are swinging so much that means there’s an opportunity for people to engage in some profitable futures trading. But remember, risks will be high!
Oil is a commodity. That means that one barrel of oil is more or less replaceable with another barrel of oil. Don’t get us wrong, there can certainly be different grades of oil. Nonetheless, a barrel of oil of the same grade should be replaceable with another barrel of oil of the same grade. Owing to this, one can trade commodities using futures because the individual barrel of oil doesn’t matter, but instead the quality.
Futures Basics and Oil
So what are futures? A futures contract is essentially a contract in which one party agrees to buy a commodity while another party agrees to sell a commodity at a future point in time for a predetermined price. Basically, the buyer will pay for the commodity, in this case oil, at the moment the futures contract is sold. The seller will then agree to deliver it at a predetermined future date in time.
Futures allow sellers to gain access to cash immediately. At the same time, they allow buyers to lock up quantities of any given commodity now. This can benefit both parties. Of course, these days many futures traders are financial traders. They aren’t really looking to buy oil, grain, or any other commodity.
Instead, such traders are looking to cash in on price movements. Let’s say you buy 1,000 barrels of oil right now at $50 dollars with a delivery date in six months. Then oil rises to $75 dollars right before your future is due to expire and you’ll receive delivery of the oil. This means you’ll be able to sell your barrels of oil for about $75 bucks a piece and make about $25 bucks in profit off of each barrel.
Of course, nothing will guarantee that oil prices will rise. At the moment this article was written, oil was selling for cheap, and some investors have been buying up oil contracts. Will they make money off of their contracts, or could they end up losing money (which means oil prices dropped)? Only the future can tell.
When you invest in futures you’re essentially trying to predict what will be in demand in the future. Right now oil production is higher than demand so prices are cheap. Six months from now demand might be much higher, which means oil prices would also be higher, assuming production doesn’t dramatically increase.
Why You Should Invest In Futures
Some people prefer to trade futures rather than stocks because they have an easier time understanding the conditions that could affect the futures market. For example, if you’re an oil engineer you probably know quite a bit about the oil industry, so why not put that knowledge to work by investing in oil futures?
An oil engineer probably won’t have as much knowledge about a lot of stocks, on the other hand. Stocks can be difficult to invest in because companies can operate in so many different markets. Also, when investing in stocks you need to know the specifics of any given company inside and out.
Interested in commodities and futures trading? Futures are sold on the futures market. There are a few different futures exchanges, but the biggest one is based in Chicago, not New York. Futures can be used for a wide variety of commodities and other things. Heck, you can even buy market futures that are based on the value of markets and indices themselves!