Explaination of Oil Futures Question

[ZZman]

Can someone explains how that all works?

If I buy an oil contract for say X amount of barrels for 70.00 a barrel:

Who am I actually buying from?

Who makes delivery?

Do I chose what exact oil or country i want to buy oil from?

 

[Drew99GT]

Oil commodity futures and the spot market are used more for investing/trading/speculating I believe. I guess if you did buy a barrel of oil on the spot market or the futures market, you could have it delivered by whoever sold it (can you imagine how much that would cost!). If you do buy an oil future, technically the person selling it has to deliver it.

The vast majority of international oil is sold in contracts at negotiated prices and not through the spot/futures market, as that oil is bought, delivered, and refined for products.

 

[Tornado Red]

Originally Posted By: ZZman
Can someone explains how that all works?

If I buy an oil contract for say X amount of barrels for 70.00 a barrel:

Who am I actually buying from?

Who makes delivery?

Do I chose what exact oil or country i want to buy oil from?

The most-commonly traded contract is for West Texas Intermediate Crude delivered to the terminal and pipeline hub at Cushing Oklahoma. So you would be buying a contract for 1000 barrels of WTI crude.

If you take delivery, then the one making delivery would be anyone who actually owns crude oil in Cushing.

You could also buy a contract for Brent crude, which is North Sea oil. There are also contracts traded in the Persian Gulf and elsewhere in Asia, though these markets are not very liquid. Most traders use the NYMEX and ICE markets because of their liquidity, and price other grades of oil at a premium or a discount versus WTI or Brent.

 

[ZZman]

Thanks T-Red. I was hoping you would answer here. Also:

1. So who decides who gets my money and makes the delivery?

2. If I bought a oil but don't take delivery what happens to the oil I bought or the contract?

 

[Tornado Red]

Originally Posted By: ZZman
Thanks T-Red. I was hoping you would answer here. Also:

1. So who decides who gets my money and makes the delivery?

2. If I bought a oil but don't take delivery what happens to the oil I bought or the contract?


That's all handled by the exchange.

A contract is a contract. You are financially liable, you are not allowed to default on your financial obligation. You must pay. Of course you could just sell the contract before the 1st delivery date, or roll over to the next contract month. But if you hold on until the final day of trading, then you must take delivery. I suppose your brokerage is really the one on the hook, so it is who will most likely seize your house and car and any other assets you have.