Speculators versus Professionals
Last week’s article highlighted the crude oil futures market and the roles that supply and demand as well as the major market participants play in determining the direction of prices. The article mentioned that unlike stocks, crude oil futures run in spurts. There may be a trend at times, but the trends are short-lived.
The upward price spikes tend to be driven by surprise geopolitical events like last year’s weapons showdown between the U.S. and Syria and this year’s military activity in Ukraine and Iraq. Speculators are usually behind these moves because they are trading off the fear that supply may be interrupted. Oil professionals work off of a different set of fundamentals like the Energy Information Administration’s weekly supply and demand report.
Oil professionals in this case are individuals who buy or sell for companies who have an active interest in controlling the price of crude oil. Users try to get the lowest average price while sellers attempt to get the highest average price.
Some professionals use the futures markets to hedge against adverse price movements. They want to make sure their future usage is protected so they use futures contracts to assure they will be able to buy enough crude oil for future demand at a favorable prices. The worse thing that can happen to a company such as an airline is to have to go into the cash market during a price spike and pay up for the product…