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Chapter 1 of Oil: A Time Machine (2nd Edition) develops the transformation of oil from a...

Chapter 1 of Oil: A Time Machine (2nd Edition) develops the transformation of oil from a cartelized to a fully competitive sector of global economy. What is the role of spot (and futures) markets in respect to competition and competitive pricing of oil? Explain systematically.

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Answer #1

Futures market always track spot markets and either they trade at premium or discount to spot price.

Futures contracts help investors make handsome money by buying volume in lot size and expiry of such contract is within 1month, giving them opportunity to arbitrage and also earn high return on investment even by minimal price change.

Spot market prices when reduce it signals oversupply of oil and thus competition js intensive and production is rampant. Also when prices are high it shows that competition is lesser, less supply and higher demand for oil.

This supply and demand is created by traders, mutual fund houses, investment banks, institutional investors who buy futures contract.

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