What is futures term structure?
What is futures term structure?
The futures term structure curve is a representation of the backwardation/contango rate for the different maturities of futures contracts. This price gap between different maturity contracts is quantified as the roll return.
How do you explain oil futures?
Oil futures are contracts in which you agree to exchange an amount of oil at a set price on a set date. They’re traded on exchanges and reflect the demand for different types of oil. Oil futures are a common method of buying and selling oil, and they enable you to trade rising and falling prices.
How are oil futures settled?
The first six contract months in NYMEX WTI Crude Oil futures (CL), Natural Gas futures (NG), Heating Oil futures (HO), and RBOB Gasoline futures (RB) are settled by CME Group staff based solely upon trading activity on CME Globex between 14:28:00 and 14:30:00 Eastern Time (ET).
How does oil futures delivery work?
Futures delivery works basically the same way—it’s the receipt or transfer of an actual commodity or product. But unlike online shopping, only two methods of delivery are available for futures contracts, and those methods are determined ahead of time.
What is oil backwardation?
Yet, the oil futures curve is currently in “backwardation” which describes the situation when spot prices and the front month futures price (CL1:COM) exceed the futures prices for delivery in months that are further out.
What exactly is the oil futures contango market?
A contango market occurs when prompt crude oil prices fall below those further out in the future. There are futures contracts for each month going out many years. Contango is normal for a non-perishable commodity, like crude oil and products, which have a cost of carry.
How do you short oil futures?
To enter the short futures position, you have to put up an initial margin of USD 12,825. A week later, the price of crude oil falls and correspondingly, the price of NYMEX Brent Crude Oil futures drops to USD 39.78 per barrel. Each contract is now worth only USD 39,780.
How long can you hold oil futures?
Most oil futures contracts represent the purchase and sale of 1,000 barrels of oil. When the contract is purchased, it specifies the delivery of these barrels of oil at a predetermined date (up to nine years away), or expiration date, for a predetermined price.
How do you trade crude oil futures?
Another way to day trade crude is through a fund that trades on a stock exchange, such as the United States Oil Fund (USO). Beginners may find this strategy more accessible since they can trade price movements in crude oil through the stock trading account they likely already have.
Why is the oil futures curve in backwardation?
Some commentators see the backwardation of the futures curve as an indication that the market anticipates a decline in the spot oil price over the next few months. Hence, buyers who need oil today are willing to pay a higher spot price than buyers who may need oil say four months from now.
What is the oil futures contango market?
Why are futures more expensive than spot?
Futures prices above the spot price can be a signal of higher prices in the future, particularly when inflation is high. Speculators may buy more of the commodity experiencing contango in an attempt to profit from higher expected prices in the future.
