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Determining Oil Barrel Pricing

Saturday, December 26th, 2009

A lot of factors, many far too complicated for the newbie to realise, but we are going to take a look at some the basic factors.

First, as a matter of disclosure, I made a fair sum of money playing the movements of oil though I’m no longer invested in oil.

The market offers a new sort of investment product known as an ETF or Exchange Traded Fund. These ETFs are offered in a selection of different forms. I purchased an ETF that went up in price when oil price per barrel went up. Then, I bought a similar ETF that went up in price when the price of oil went down. ( Called an inverse or short fund ) if you’re looking to profit when the oil barrel price goes up ( or down ) this is one way.

I will give you the “tip of the iceberg” rationalization of how the oil barrel price is determined but as we said earlier, it’s much too difficult for the layperson to realise and overtly, not very crucial to the beginner. The price of oil price per barrel is controlled by futures contracts. A futures contract is a guarantee to supply a certain amount of oil or pay ( settle ) the contract in a specified month. Most futures contracts result in no delivery of oil. Instead, it is an investment product designed to make financiers cash.

When the mixed resources of commercial stockholders come together, the price of oil can be moved in ways that don’t coincide with supply and demand. For example, when the Florida orange crop is damaged by unseasonably cold temperatures, the cost of juice concentrate ( which is also traded as a futures contract ) goes up as the supply is lower and the demand is the same.

Oil doesn’t always follow this conventional logic and many have asked why. Most now agree ( and a federal study proved ) that the cost of oil has been artificially moved by stockholders rather than elemental demand and supply in the past. There is a new push to stop this but faces heavy headwinds.

Regardless of what the mavens believe about the way in which the market needs more oversight, “the market” always has a technique of correcting artificial price levels. We have seen the cost of oil prices today come back down to levels that are arguably just as synthetic as when they were high. In the summer of 2008 the oil barrel price was at its high and then some months later, it was at its low,

The mavens have held on to the idea that the correct price based totally on demand and supply, transit costs, and research and development costs, is about $110 per barrel. So what occurs if we average the highest and lowest price of oil? We come up with a price of $95.

What does oil barrel price have to do with us? Gasoline is sold in futures contracts of its own but it approximately is contemporary with oil costs.

How are you able to make cash in oil? Unless you have truly giant tanks or really plenty of money, you can’t earn cash on oil immediately but read about ETFs and how to trade oil as a stock.