How Crude Oil Prices are Determined
The price of oil is set in the global marketplace. Oil is traded globally and can move from one market to another easily by ship, pipeline, or barge. As a result, the supply/demand balance determines the price for crude oil around the world.
Prices vary globally to reflect the cost of transporting crude oil to that market and the quality differences between the various types of oil.
Spot Markets versus Futures Markets for Crude Oil
In the spot market, oil is bought and sold for cash and delivered immediately.
In addition to all of the actual barrels of oil that are traded, there is a second market – the futures market – that trades in "paper" barrels. This simply indicates that oil is traded on "paper" based on a perceived monetary value of oil and there is not usually a physical exchange of the product. Paper contracts for oil are bought and sold based on the expected market conditions in the coming months, or even years.
There are two types of buyers and sellers in the futures market:
- Actual producers or users of crude oil (e.g. refineries) and those who buy futures contracts as an investment, without any intention of ever taking possession of the actual crude oil. The first group uses the futures market to protect themselves from price volatility by locking in revenue to cover costs and to guarantee profits from future oil production. Refineries buy futures contracts to lock in the costs of purchasing oil.
- The second group (investors who don’t produce or consume oil) purchases oil futures contracts for investment purposes and can make money by correctly guessing whether prices will increase or decrease in the future.
Media most often quotes the futures market price in the nearest month as representative of the current price of oil. The current spot price for oil is influenced by the futures market price because the futures price represents the market's collective view, at a given point in time, of where prices may be headed.
Crude oil prices
Previous years - This is historical data and for information purposes only.
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