Every day, millions of gallons of crude oil are sold and purchased on the open market. Most of this oil will be refined into more usable fuels, such as gasoline, kerosene and jet fuel, which is burned to power engines and to produce light and heat. This oil can be purchased in a number of ways, including at the point of production or in the form of a derivative. In all cases, the trader must secure both a buyer and seller who will agree on when and where the oil is to be delivered.
The Spot Market
Identify where you want to purchase the oil. Oil is produced by many countries and can be purchased from and through hundreds of different locations. First, decide on the one or more locations where you want to take delivery of the oil.
Find a seller. Once you have identified a location where you want to produce oil, find local companies that are selling, Some oil companies are bound into long-term contracts in which the oil they produce is pre-sold. Others, however, will be willing to sell oil on the open market near the point of production, called the "spot" market.
Find a buyer. If you are looking to sell oil, call around to local trading houses and find who has purchased oil. Sometimes, those trading in oil will secure a buyer and then look for someone who is selling, hopefully at a profitable price.
Find transportation. To deliver the oil between the buyer and seller, you must secure transportation. This can include shipping the oil by rail, pipeline or tanker. Make sure that the cost of purchasing the oil and shipping it does not exceed the price at which you are selling it.
Decide when and where you want the oil. On commodity exchanges, oil is purchased in the form of a derivative, which is a promise to deliver a certain amount of oil on a certain date for a certain price. In many places, such as the Chicago Mercantile Exchange, oil derivatives are traded on a physical floor, like stocks.
Contact a broker. Only brokers have access to the trading floor in which commodities are sold, so orders must be placed through them. Brokers can be contacted by telephone or through the use of an Internet trading service.
Take delivery or resell the oil. After purchasing a derivative, the buyer has two choices: resell the derivative (hopefully for a profit) or take delivery of the oil according to the terms of the contract.
- "International Crude Oil Market Handbook 2009"; Energy Intelligence Group; 2009
- MarketClub Lesson: Learn How To Trade Crude Oil In 90 Seconds
- "Fundamentals of Trading Energy Futures & Options"; Steven Errera, Stewart L. Brown; 2002
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