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 312-920-0212.
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.