Thank you for that. I've never understood why gasoline, diesel, natural gas fluctuate so much. Like most laymen, I always figure the cost was set by how much is readily available on the world market. What is the reasoning behind futures contracts and who controls it?
“What is the reasoning behind futures contracts and who controls it?”
You’re welcome. The futures market is used by sellers and buyers of oil to set futures prices paid for many products. It isn’t just oil, the futures market sets futures prices for gold, silver, corn, hogs, cattle, coffee, rubber, you name it. Traders try to guess ahead about supply/demand to make money. People within the various industries use futures to hedge against possible price shocks from events like hurricanes for example. Is a rancher worried that the price of cattle will go down before his have grown enough to sell? The rancher buys the right to sell at a fixed price in the future. It’s an insurance play, give up some possible upside to insure against possible large downward movement in the price of your preferred commodity.
The same thing can be done with the S+P 500 and individual stocks as well. Search for “covered calls” to see how it works to lower risk in stocks.
People think prices jump around a lot, but without futures contracts prices would jump around much more violently.
“Oil futures contracts are simple in theory. They continue the time-honored practice of certain participants in the market selling risk to others who gladly buy it in the hopes of making money. To wit, buyers and sellers establish a price that oil (or soybeans, or gold) will trade at not today, but on some coming date.”