Posted on 30 August 2011.
Trading crude oil futures is different from just trading crude oil itself. A futures contract is a legally binding, financial instrument that involves the delivery of a commodity at a specific time in the future. The typical contract for crude oil futures specifies the amount at 1,000 barrels. Such a contract also specifies the price that will be paid for the crude oil upon delivery. It is this feature of a futures contract that allows an investor to achieve a good return on a futures investment.
Since the price of crude oil on the exchange market experiences a great deal of volatility, shrewd investors can watch the price closely and sell their futures contract before delivery. They profit from the difference between the purchase price and the price at which they sell the contract. With crude oil so precious a commodity at this point in time, there is high liquidity in its futures market. It is usually easy to find a buyer for such a contract.
Even though trading crude oil futures involves such a large amount of oil, small investors can still participate in these contracts because they can control a shipment with only a fraction of the money needed to buy the contract. This leverage enables day traders and other independents to engage in trading crude oil futures.
The most lucrative aspect of this sort of trading comes from the infamous volatility in oil prices. Now that so many countries’ economies are developing due to outsourced labor from advanced countries, the demand for crude oil has increased spectacularly. The dramatic spikes in oil prices are opportunities for investors trading crude oil futures to reap big profits.
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