The Shakeup in Oil Futures

Elias Hubbard
September 22, 2020



For millions of oil investors, particularly those who buy and sell futures contracts, the big question during the last half of 2020 is, will demand ever return to pre-COVID levels? Of course, there are other queries on the minds of active traders, but that one sort of encompasses all the other ones. Here are the most important factors to monitor if you have money in the futures market.

Watch Expiration Dates

For those who trade oil futures via contracts for difference, it's vitally important to keep a close eye on oil contract rollover dates. When your broker sees that one of your futures contracts is about to expire, they swap out the old contract with a new one so you can continue to trade without having to make a sale, find a new contract to buy, purchase it, and begin again. The swap-out is a courtesy offered by most CFD brokers, but remember that the new contract will come with a fresh, updated price. If you aren't careful, a quickly changing market can mean you pay a premium for the luxury of continuous market participation.

U.S. Demand

The U.S. is the single biggest consumer of oil in the world. The nation also produces about 13 million barrels of the stuff per day while consuming about 20 million barrels. What does this mean for traders who buy and sell futures contracts? It means that it's essential to have a firm grasp on the key factors that currently move the level of demand for crude in the U.S. retail, wholesale, and manufacturing segments.

Right now, there are four elements that have an effect on consumption, demand, and per-barrel price. The first is the driving season, which ends in September. It's an annual rite of passage, in a way, that tends to dampen demand and push prices down. The second factor is the virus, which led to massive work stoppage and large-scale social lock-downs. That translated into very little vehicle usage as well as an historically low demand for airplane fuel. Third, there's been a slow but sure conversion to renewable energy in everything from factories to homes and cars. The last thing that's been beating down the price of a barrel of crude is the strengthening dollar. Oil is denominated in dollars all over the world, so when the greenback does well, barrels cost less. The recent upswing in the strength of the dollar has put strong downward pressure on prices.

The Trend Toward Renewable Energy

Companies, local governments, and individuals are slowly moving toward consumption of renewable energy resources. For evidence, it's possible to look at the electric vehicle market, one of the shining stars of the consumer retail field in recent years. Once considered oddities, cars with all-electric drive trains are now commonplace. But the big story in this product niche is the unprecedented popularity of hybrid vehicles that use a combination of gasoline and electricity as their sources of propulsion. Sales of hybrids has gone through the roof in every major global market. Apparently, consumers want cars that are less dependent on gasoline, and manufacturers are happy to build and sell them.

By definition, futures traders take something other than an immediate view of factors that affect the price of oil. For long-term investors who not only take part in the futures market but also buy oil-based stocks, the trend toward sustainable energy is perhaps the single most relevant factor of all. It pays to watch the news and stay informed about trends in the auto industry.

Fossil Fuel Fundamentals

Oil is unique in many ways, and it's important for traders to pay attention to every factor that can have an impact on price. Everything from world politics, the activities of OPEC, U.S. energy demand, the continuing COVID situation, and dozens other things can cause the per-barrel price of crude to rise or fall rather quickly. Why is this so? It's because oil is a highly valued commodity. It's literally the fuel that the world runs on. Without it, virtually all meaningful economic activity would stop.

The other part of understanding the behavior of this unique form of fuel is its location. Many of the earth's largest reserves of it are in places that aren't exactly paragons of political stability. That means supplies can't ever be guaranteed, nor can prices. Unlike the price of corn, gold, stock shares, and lumber, the price of oil is affected by dozens of unrelated factors that are often hard to identify, much less quantify. The only sure thing in the market, especially during 2020, is uncertainty.

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