How to be an oil futures speculator

[Owlet]

"Simple. You take an option to say, SELL oil in three month’s time. Let’s say the current price is $98 a barrel and the 3-month future price is $103. You think this is hogwash and the price is going to drop to less than $85 within three months. You sell March oil at $103. You pay a deposit to secure ‘your’ oil sale as you paid to secure your oil purchase.
How on earth can you sell oil you don’t have? Simple. Your sell order guarantees a buyer of ‘your’ oil in March at $103 – in effect, someone has contracted to buy your oil at $103 a barrel in March. This is someone betting against you, buying March oil at $103/barrel, just like you did in the first example. Come March, you MUST buy your oil at $103/barrel, or pay you the difference between the March price and $103.

If the price in March is only $85 a barrel (as you predicted) then you just buy oil at $85 a barrel (the current price) and sell it to the guy who contracted (unwisely) to buy it from you at $103! You pocket the $18 difference! Of course, no oil ever changes hands. This is just a paper exercise. Also, oil is just one of thousands of possible futures ‘plays’ you could make. There is nothing special about oil. I am just using this as an example.

Who is the ‘mug’ who contracted to buy from you at $103. Why, just another punter, like you buy who thought the opposite to you. He thought the price was going to $120 and then YOU were the ‘mug’ for contracting to sell him March oil at ‘just’ $103 a barrel. He was looking forward to scamming you out of your oil at the giveaway price of $103, and selling it immediately for $120 and pocketing the $15 difference. He could have been right, of course. In which case, he would have won, you would have lost. This is just 1 barrel of oil but imagine if you had to buy 1000 barrels at $103 and sell to him at $120, thus losing $17,000! Ouch!"

http://www.financial-spread-betting.com/academy/selling-short.html

[Warren Stupidity]

1. Commodity speculation by financial institutions results in price volatility and

a disconnect between price, production, and consumption. Speculation in the US was highly regulated from 1936 until the barn doors were opened to the usual wall street banksters in the 90's. The consequences of deregulation in commodity speculation are obvious and of benefit to nobody except the .01%.

[MarkCharles]

2. Exactly right! And so concisely said!

Chris Hayes had two people on his show on Sunday morning explaining this very issue, and the reasons behind the increased price of gasoline, due largely to speculation like this. Surprisingly 1/3 of all these speculators are big banks, who should be kept out of the market, and would be if Dodd/Frank were properly implemented, but, of course, Republicans and banks are still fighting about the final regulations.