Oil futures are contracts for the future delivery of oil.
Futures contracts are contracts between two parties for the future delivery of a set amount of a commodity. Oil producers can use futures contracts to lock in a price for the future delivery of their product. Speculators can use oil futures to make a bet on whether the price of oil will go up or down in the future.
Identification
Oil futures are standardized contracts for the future delivery of a set amount of oil. The contracts trade on organized commodity exchanges. Futures contracts are available with settlement dates one month to two years in the future. Oil futures call for the delivery of 1,000 barrels of oil on the settlement date of the contract. The value of oil futures will rise and fall based on traders' expectations of the direction of the price of oil.
Types
Oil futures contracts trade on the value of several types of crude oil. The best known is the price of West Texas light sweet crude. Oil futures also trade on the price of Brent Sea crude oil, Russian export crude oil, Dubai crude oil, Gulf Coast sour crude and the Argus Sour Crude Index. The e-mini futures contract on light sweet crude is popular with individual traders. An e-mini oil futures contract is for the future delivery of 500 barrels of oil.
Function
Oil futures contracts are purchased and traded through commodity brokers registered with the Commodity Futures Trading Commission. Opening trades can be to purchase contracts for future delivery or to sell contracts. When a futures position is opened, the trader is required to put up a margin deposit to secure the contract. Margin deposits are approximately $5,000 per contract for light sweet crude and half that amount for the e-mini contract.
Potential
A trader can take an opening position in oil futures contracts in either direction. A buy to open will profit if the price of oil increases. A sell to open will increase in value for the trader if the price of oil declines. The standard oil futures contracts has a minimum price change of one cent per barrel. This penny price change equates to a $10 change in the value of an oil futures contract. If the price of oil changes by $1.00, the futures trader will gain or lose $1,000 on each contract held.
Warning
The amount of leverage used in futures trading exposes the owner of oil futures to large gains or losses as the price of oil changes. It is possible to lose an entire margin deposit in a very short time and it is possible to lose more than is initially invested. Oil futures contracts are also for the physical delivery of crude oil. Traders who do not actually want to sell or buy oil must ensure they have closed out their futures positions before the contract settles.
