When most of us think of oil, what comes to mind is the olive variety we sauté vegetables in and drizzle on our salads or the black liquid mechanics replace in our cars every 3,000 miles. Visions of a certain old sitcom, fields in Texas and cargo disasters probably also pop up. However, the majority of people don’t think about oil being something in which the average person can invest.

Oil became a widely traded energy source during the latter part of the 20th century and continues to have deep political ties, especially evident in the continually fluctuating prices in the market and conflict with oil-producing countries. Today, crude oil, gasoline, and heating oil are all traded on commodities markets.

Trading

For the most part, oil contracts are a type of futures trading; a price is decided on during one particular date and then the product is delivered on an agreed upon date in the future.

Oil contracts trade on more than one commodities exchange and updates on the status of oil contracts can be found 24 hours a day. Everyone from speculators and hedgers to consumers keep a regular watch on the price of crude oil, especially since for the average automobile owner it determines how much it is going to cost for that next full tank of gas.

Places where oil contracts are traded include the New York Mercantile Exchange (NYMEX), the world’s largest physical commodity futures exchange, and London’s International Petroleum Exchange (IPE). Prices quoted at NYMEX determine the prices people pay for various commodities around the world . ICE Futures (formerly IPE) hosts the buying and selling of 50% of the world’s crude and refined oil contracts daily trades .

More Oil Contracts

In addition to futures trading, oil contracts can trade on “spot” markets.  Also known as cash trades, this type of commodity trading happens immediately. The oil industry uses the spot market to balance supply and demand, though it could be argued that this is doing nothing to keep gas prices at a reasonable level.

Though the distinctively shaped state of Texas doesn’t contain all the oil that’s fit to pump, The United States Energy Information Administration (EIA) states that West Texas Intermediate crude oil does set the base price for oil sold in the Gulf Coast region of the United States. Because it’s a high quality Southwest U.S. crude oil, it serves as a benchmark to measure all other cultivated oil.

Dealing with oil contracts is an incredibly risky venture. Therefore, unless you have it to lose, don’t put all your money into one derrick.