Ebele Kemery: Invest in oil futures contracts as they offer various trading options and solid risk management. Among all commodities, light sweet crude oil, which is commonly used in heating oil, gasoline, jet fuel and diesel fuel, is the most popular worldwide. As such, it is traded rather aggressively.
With oil futures contracts, you have a legally binding agreement to purchase or sell a particular amount of oil at a certain price at a future time. The price is based on supply and demand at any given time. As the market has shown, supply and demand of oil fluctuates almost daily. Those who invest in future contracts have the option of a cash settlement or having the actual oil delivered to a specified location.
Trading in oil futures contracts is specified in units of barrels. Usually this involves a number of grades, which are used both in the United States and internationally. a standard contract equates to 1000 barrels of oil, but for investment portfolios, the agreement usually relates to 500 barrels of crude oil, i.e. half the size of a standard futures contract
The major exchanges for oil futures contracts are the New York Mercantile Exchange and the Intercontinental Exchange. Trading could be for oil delivery in a few months or several years in the future. Typically, three months is the norm for a contract.
Oil futures contracts exist in many forms. A short hedge contract allows investors to buy futures to sell oil, whereas a long hedge contract allows investors to buy futures to buy oil. It is usual to find a mix of both in a portfolio. For a number of years, there has been increased interest in oil as it is considered a better option to stocks.
Oil futures contracts are often used in risk management of portfolios. Investors, by buying or selling a security, purchase or sell a future security with the opposite risk. In this way losses and gains counterbalance each other and also balance the risk in a portfolio between current and future market prices. It goes without saying that a more balanced a portfolio, the less risk there is for a major loss.
Very often, oil futures contracts are used for hedging, especially amongst businesses that make products or services that use oil, in particular, the airline business. It is difficult to set a price for these products or services as the market is so volatile. But buying or selling future contracts for this commodity helps to reduce the risk and overcome constant fluctuation.
Oil futures contracts are often used for speculation, where investors hope to make a profit based on future prices of the commodity increasing or decreasing. Financial institutions, including banks, generally make up the major portion of speculators and are an important piece to the trading market.
Ebele Kemery a Portfolio manager and associated with JPMorgan Investment Management. Ms. Kemery is responsible for formulating our view and investment decisions for major energy commodities including, but not limited to: crude oil, gasoline, heating oil and natural gas.
Ms.Ebele Kemery is a Commodities Leader with a track record of consistently profitable trading efforts, and expanded business through understanding of client needs and developing customized solutions that leverage a wide variety of techniques and market intricacies.
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