Some of the most exciting futures contracts are those related to energy -- crude oil and its distillates, plus natural gas.They are light sweet crude ...
Some of the most exciting futures contracts are those related to energy -- crude oil and its distillates,
plus natural gas.
They are light sweet crude oil (not brent crude), natural gas, unleaded gasoline (RBOB) and heating oil.
All of them are quoted in dollars and cents.
One contract of light sweet crude oil is 1,000 barrels. One tick is worth $10.
A contract of natural gas is 10,000 mmBtu, or million BTUs, British Thermal Units. That's a measurement of heat, so it's an indirect way of stating how much heat can be realized from burning the natural gas, since of course that's a standard, known figure. I guess that's because, as a gas, it's not as easy to determine its weight or volume. One tick is $10.
Unleaded gasoline is 42,000 gallons to the contract, with one tick $4.20.
One contract of heating oil is 42,000 gallons, and so one tick is also $4.20.
These contracts require high margins. They are extremely volatile.
Energy is basic to civilization as we know it. Everybody needs it, but not everybody or every country has it in equal quantities.
It can be used as political weapon, as we first found out in 1973 when Arab countries instituted an oil embargo against the United States in retaliation for supporting Israel in a war they had. I believe that every President from Nixon forward, probably including Obama, has sworn to reduce our dependence on foreign oil -- and failed to deliver on that promise.
Other developed countries such as Japan and Europe are even more dependent on it.
Recently, Russia has cut off natural gas flows to Europe as a political weapon.
As I write, the British Petroleum oil leak in the Gulf of Mexico is upsetting many people.
There's a lot of speculation that if Iran ever carries through its promise to attack Israel, that it would retaliate against Israel's supporters by closing off the Gulf of Homan, through which much Mideast oil flows, which it could easily due by sinking a big tanker there.
In 2008 crude oil went from around $150 a barrel to under $50. Part of that was no doubt due to the economic slowdown caused by the financial crisis and the recession.
Do you know how to predict such events? That's not even including the obvious factors such as how much oil is being pumped, how much remains in known reserves, new reserves that may be discovered, the use of new technology to get it from oil sands in Canada and the western U.S., environmental regulations (which are blocking a lot of oil in the U.S.), and so on.
It's probably true that energy in the future will be more expensive (unless a new technology comes along, which is possible), but in the short term prices will remain volatile.
