Crude Oil Futures Price
The crude oil futures price is different than the crude oil price in the cash (physical) market. Generally,
the price of a commodity for future delivery is higher than the cash price due to carrying costs (insurance, interest, and
warehousing fees). This is called contango. The opposite of contango is backwardation. Backwardation is when the price of
a commodity for future delivery is lower than the cash price Backwardation is normal in a “seller’s market.”
When
you trade crude oil futures, your futures price depends on where you get into the market. After you post your initial margin,
your profit or loss depends on where you enter and exit the market (minus transaction costs).
For example:
The contract size for crude oil is 1000 U.S. barrels. So each $1 move equals $1000. As the market
moves your account value adjusts. If your account value drops below the maintenance margin, a margin call is due. A margin
call can be met by offsetting positions or adding money to your account.
Trading futures is like driving a car without insurance. You save the insurance premium, but if you
crash you will wish that you were insured. If you have very deep pockets or deal with the physical crude oil product then
futures may be for you. If you are a speculator with a limited amount of risk capital then crude oil options are a better
way for you to invest in the crude oil market.
