Oil is an essential resource in the economy across the world today. It is a crucial resource that gives you the bulk of energy for transportation, manufacturing and it is the most traded commodity across the globe.
Paul Favret – An insight into the prices of oil
The prices of oil are set globally in a spot as well as future markets for crude oil and its related products by participants in the market like long-term investors, long-term spectators, producers, and consumers. Paul Favret is the CEO and Founder of Source Energy LP. In the past, he was the Chief Executive Officer at Aspect Energy.
An overview of crude oil
Crude is essential; however, the process to make it is very slow. This results in suppliers becoming slow to adjust to the consumption and production of it when the prices dip or rise. This implies that the prices of oil should move in such a way to rebalance the market in the event of disruptions like when there is a drop in demand caused by a pandemic or when the supply is interrupted after an economic sanction or the outbreak of war.
The spot market and crude oil
You can buy crude oil from the spot market if you have sufficient deep storage facilities for accommodating a shipment of about 600,000 barrels from a tanker or even about 25,000 barrels every month through a pipeline. For most people investing in futures for crude oil is more practical and realistic.
On the CME Globex Futures Exchange, one contract for crude oil represents 1,000 barrels. To trade futures via an online brokerage account, you need to get a margin and pass a suitability review for a broker, which is not very hard for you to do these days.
The above process entails you filling in a form online and waiting for some days. Some brokerages need a minimum value in your account for authorizing the futures trading, while some do not. The commissions and fees for the above will differ as well.
At the same time, you have the option to trade futures with the help of a full-service broker, generally an advisor in commodity trading. Some crude oil futures agreements use cash settlement during expiration, while others need the transfer of crude oil at a pre-specified delivery point.
Hedge production revenues
Consumers and producers of crude oil deploy futures to hedge production revenue and energy costs, respectively. Those speculators that try to profit from changes in the price in the short term are less likely to attain delivery of the commodity at the expiration of the futures contract.
According to Paul Favret, in April 2020, the expiring May West Texas Immediate crude oil price dipped to $37 for every barrel shortly prior to the expiration. This meant traders were ready to pay in order to avoid the delivery of crude with storage facilities at the beginning of the coronavirus pandemic that year.
