A year ago, a barrel of West Texas sweet crude sold for $37.05 on the spot market. On July 5, the price was $59.59, a 60% spike in price.



But don't worry. That rate of increase isn't sustainable forever. Eventually the good old laws of supply and demand will combine to slow the meteoric rise in oil prices.

Unfortunately, in the near term, those laws are taking their sweet time to go to work. There's certainly a good chance that over the next few days or weeks, oil prices will retrace part of their recent run to $60 from $48 as speculators take profits. But the trend for the rest of this year, and for 2006, is still up. I'd say we're likely to test $75 oil before the laws of supply and demand kick in to: 1) at least put a damper on the rate of price increases and 2) maybe even send the price back toward $50 a barrel for a while.

Originally posted by utrex
If that were the case, the prices would plummet as we approach that month's expiration date. The commodity traders don't take delivery on the oil (what would they do, store the barrels in their basements???), so they are forced to liquidate long positions before this time. Oil is not settled in cash (like a forex contract would be), so if you own the future at expiration, you have to take delivery.

A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something, for a set price, that a seller has not yet produced. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities—remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators.