In theory, oil futures contracts are straightforward. They maintain the time-honored practice of certain market players selling risk to others who eagerly purchase it in the expectation of profiting. To put it another way, buyers and sellers agree on a price for oil (or soybeans, or gold) that will be traded not today, but on a future date. While no one can predict the price of oil nine months from now, participants in the futures market believe they can.

Assume Commodity X is currently selling for $30 and will be available for $35 in a January contract. A speculator who feels that the price would eventually rise above that level, say to $45, can buy the $35 contract. If their prediction is correct, they can buy X for $35 and sell it for a $10 profit right away. However, if X falls short of $35, their contract is rendered null and void.

Oil futures are financial contracts that enable parties to buy or sell a specified amount of oil at a predetermined price on a future date. These contracts serve as a crucial component of commodity trading, allowing participants to hedge against price fluctuations or speculate on future oil prices. The two main types of oil futures are West Texas Intermediate (WTI) and Brent crude, representing benchmark grades of oil. Traders can take either a long position, committing to buy oil in the future, or a short position, agreeing to sell it.

The futures market relies on supply and demand dynamics, geopolitical events, and economic factors to determine oil prices. Futures contracts are traded on commodities exchanges, providing liquidity and a platform for buyers and sellers to engage in price discovery. Oil futures play a pivotal role in risk management for oil producers and consumers, providing a mechanism to lock in prices and mitigate the impact of market volatility.