Are Futures the only way to determine the price of a commodity? Why does it affect the prices globally?

Question

I dont understand why we all depend on futures to see the price of a commodity like say crude which has now touched 147$/barrel.

so in a way its a speculative business where prices are ACTUALLY inflated. Then why are people dealing with futures. People have to suffer i guess because of this turmoil. Isnt there anything else to determine price of commodity. Oil prices have shot up more than double from last yr.....please guide.

Answer 1

When long-term supply agreements are not available ANYMORE, oil consumers dependent on spot prices have to turn to the futures markets to lock in prices into the future. Southwest airlines did this and was successful keeping jet fuel costs below its competitors who face bankruptcy. Many of you do not know the basics or how the futures market of commodities works. The speculators provide liquidity to the futures market and they are being scapegoated by the OPEC cartel and the OILCO OLIGARCHS WHO PLAY GAMES WITH EVERYONE. THE TWO Latter GROUPS HAVE US OVER A BARRREL PROTECTING THEIR OIL HEGEMONY BY OCCCUPYING IRAQ with the US military FOR THEM! WAKE UP OR NOT? YOUR CHOICE! Either way you are getting both ends of the short stick! LOL3x in pain.

Drilling for oil is a short-sighted baloney solution since US oil proved reserves are in decline having started to irreversibly decline after peaking. Of course professional oil investors love it, but it is best to conserve and move onto a new energy infrastructure that makes the US energy system independent of oil imports esp from the problematic mideast!

Answer 2

No, actually, prices are usually settled in the "spot" market, which is to say, when a commodity (you are referring to oil here, but it could be rice) is sold to the end user.  In this case, say the Saudi oil company is selling it to the US refiner who will eventually sell it to a gas station once it has been "cracked".  (Oil comes out of the ground one way, but it has to be refined to different products to fly planes, power cars, heat homes, etc.)

Futures are just a way for oil companies to sell some of the oil they know they will produce next month, next year, two years from now, whenever, into the market right now.  In an example, let's say Venezuela thinks the oil price won't stay this high, they will want to sell some of their oil from next year now.  Iran did this last year at $100.  So did Exxon.  So did Norway's state oil company Statoil.

The buyers of these futures contracts are the users, like those refiners.  They know they will need the oil, and they know about how much they will need, so when they see a price they want to lock in, they will buy in the futures market, rather than gambling that they will have to pay more in the spot market.

Either party may be wrong in their decision to use the futures market, in which case they will either lose money, or at least make less than they might have.

The other people who deal in the market are financial players.  They are always vilified as speculators, and they are speculators, but they should not really be vilified.  What if an oil company wanted to sell oil forward and there was not a refiner that wanted to buy?  Well, the price would just keep falling unless someone stepped in.  What if a refiner wanted to buy forward but there wasn't an oil company that wanted to sell?  Well the price would just keep spiking up until someone stepped in.  If there are more futures contracts than physical commodity, they just get settled in cash.  But if there were no financial buyers, prices would be much more volatile on both the up and down sides, and you could see oil spike to $200 on certain days.  (And crash to $100 on others.)

In all, demand is outstripping supply which is why prices have gone up.  When the margin of excess supply gets very small, very small increases in demand cause very large moves in price.

I can guarantee that if the US announced that it would engage in significant drilling offshore and in Alaska, oil prices would collapse almost immediately.  Even though the oil wouldn't be available for several years, this is what would happen:

Countries with excess oil like Saudi and Iran would know that in several years the price would be much lower because of the additional oil that would be available then.  They would want to sell more now at the higher prices while they can.  So they would start pumping more, increasing supply immediately.  Moreover, the people who are long futures contracts would see that supply coming, and would start selling their futures knowing the supply would bring down the price.  The combination of these things would crush the oil price.

Answer 3

futures are just speculative: they do not indicate the true value of a commodity. becuase they fluctuate, the values are not set in stone.

it also has to do with our weak currency: and that may be the primary cause here. if you watch the markets, vs the dollar, usually the euro, oil, and gold/precious metals are up when stocks and the dollar are down.

the potential bailout of fannie/freddy leads to further speculation that the dollar will weaken; thus the chain reaction is oil drives up...there is absolutely no foundation in supply and demand, just the market perception of future supply demand, and that is todays value. the price we pay today is the speculative  value of the commity tomorrow or next month...but this is not entirely accurate but it is the price determinate.

what is the true value of  a commodity? depends on the amount of time factored as well. today, i think because of our currency issues, gold and industrial metals are undervalued, and oil is overvalued. i also think stocks in general are way undervalued.

really; i dont know. seems like one big speculaiton