 Crude
Oil Futures
Free $25 Crude Oil & Energy Trading Kit
Crude Oil - Buyers and
Crude Oil Sellers
If you are in the physical crude oil market, you might be able
to benefit by utilizing the futures markets to hedge your crude
oil deliveries and shipments. Refiners and people who deliver or
transport crude oil might be able to minimize risk of price fluctuations
by hedging in the crude oil, unleaded gasoline, or heating oil markets.
Even if your hedging a postion for a few days or a few weeks, it
may be very beneficial for you to do so.
Feel free to contact us with any questions, or request a free investor
kit. For additional help or information with crude oil hedging,
call a licensed futures broker at 800-840-5617, or 219-865-1031.
How crude oil and other hedging works:
The details of hedging can be somewhat complex but the principle
is simple. Hedgers are individuals and firms that make purchases
and sales in the futures market solely for the purpose of establishing
a known price level--days,weeks or months in advance--for something
they later intend to buy or sell in the cash market (such as at
a grain elevator, in the bond market, or delivering crude oil).
In this way they attempt to protect themselves against the risk
of an unfavorable price change in the interim. Or hedgers may use
futures to lock in an acceptable margin between their purchase cost
and their selling price. Consider this example:
A jewelry manufacturer will need to buy additional gold from his
supplier in six months. Between now and then, however, he fears
the price of gold may increase. That could be a problem because
he has already published his catalog for a year ahead.
To lock in the price level at which gold is presently being quoted
for delivery in six months, he buys a futures contract at a price
of, say, $350 an ounce.
If, six months later, the cash market price of gold has risen to
$370, he will have to pay his supplier that amount to acquire gold.
However, the extra $20 an ounce cost will be offset by a $20 an
ounce profit when the futures contract bought at $350 is sold for
$370. In effect, the hedge provided insurance against an increase
in the price of gold. It locked in a net cost of $350, regardless
of what happened to the cash market price of gold. Had the price
of gold declined instead of risen, he would have incurred a loss
on his futures position but this would have been offset by the lower
cost of acquiring gold in the cash market.
The number and variety of hedging possibilities is practically
limitless. A cattle feeder can hedge against a decline in livestock
prices and a meat packer or supermarket chain can hedge against
an increase in livestock prices. Borrowers can hedge against higher
interest rates, and lenders against lower interest rates. Investors
can hedge against an overall decline in stock prices, and those
who anticipate having money to invest can hedge against an increase
in the over-all level of stock prices. And the list goes on.
Whatever the hedging strategy, the common denominator is that hedgers
willingly give up the opportunity to benefit from favorable price
changes in order to achieve protection against unfavorable price
changes.
*The risk of loss exists in futures trading.
Crude Oil Price - Current price on crude
oil and other markets.
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