Oil speculation involves buying and selling oil based on current events, leading to higher costs. Commodities are traded in futures contracts, representing potential price increases or decreases. Negative events lead to more contracts being bought, driving up prices. Speculators also hedge against future changes in oil reserves.
Oil is a commodity often traded on multiple exchanges around the world. This trade leads to oil speculation, which is buying and selling oil based on current events. Since the demand for oil naturally increases as economies progress, investors can anticipate this demand and buy petroleum commodities. This drives up the price of oil, creating higher costs. Oil speculation also allows investors to buy or sell the commodity when negative information or events hit the market.
Commodities are often traded in futures contracts. Each contract specifies that the investor will receive a certain quantity of the commodity on a specific date for an agreed price. The contracts represent the potential price increases or decreases that an investor expects in the market on the contract date.
For example, barrels of oil may currently trade at $50 US Dollars (USD) a barrel. Investors believe that the price per barrel of oil will rise to $70 USD in two months, based on oil speculation. An investor could buy as many contracts as possible at $50 USD per barrel and sell once they hit $60 USD. This creates a variable cost for petroleum products as speculators buy and sell futures contracts on the open market.
Oil speculation also leads investors to buy more contracts when negative tensions enter the oil market. Service disruptions from Middle Eastern oil-producing countries will often lead speculators to buy more contracts. National events often cause oil prices to soar precipitously, leading to copious profits for speculative investors. This will drive up current oil prices as few contracts are available. Future oil prices will also rise as investors hold contracts for oil and companies will have to pay the price quoted on the contract as there are no current oil contracts available in the market.
Another reason behind oil speculation is to hedge against future increases and decreases in a country’s oil reserves. For example, when a country’s reserves fall below the average amount needed to keep up with demand, speculators will enter the market and start buying contracts. This leads to an increase in oil prices as demand will naturally drive up the price of oil. The opposite is true when oil reserves are higher than expected. Once the investor learns that oil reserves are high, the investor has to sell his contracts to avoid incurring losses from falling oil prices.
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