Oil commodity traders place bids on contracts for oil futures,which are legally binding them to either buy or sell in the oil market in the future at a predetermined price. They can be traded on the commodity exchange. The common duration for trading in futures in the oil market is three months ahead, though even longer durations have been used.
These traders are of two categories. The first set represent companies that consume oil; for example, aviation or automobile companies. They usually buy contracts so that they can plan in advance for the payment of the oil delivered. The other kind of traders in the oil market are normal investors who simply guess what changes will take place in the price of oil in the near future. They base their judgment on recent news in the oil industry and international political events, especially in countries that are major oil producers.
A host of factors affect the bid prices of contracts in the oil market. The current output of crude oil is the most important. If there is any upcoming event that could affect the levels of production, the majority of the bids are at higher prices. Oil is usually kept in reserves as well, for backup when demand increases or supply decreases. If there is indication that these reserves will be tapped into, the price of bids goes down.
The When and Where
Seasonal surges in demand can also affect the prices of oil futures. During the summers in America, the number of drivers increases since everyone is on vacation and busy taking road trips. Trends in the oil market also follow natural disasters like floods and hurricanes, since they can partially or completely destroy oil wells and reserves. Another example of wastage of this precious commodity is oil spills on oceans from the offshore rigs; they even cause loss of marine life.
One might wonder why the need to deal with oil futures when there are regular commodity stocks on the oil market. The simple reason is the higher costs associated with physical oil. Futures are virtual, and thereby, much cheaper. The delivery date of the futures contracts is the latest deadline. If the price reaches or crosses the desired target before the delivery date, the buy or sell can be executed even earlier.