eli5: is the price of crude oil i see on the futures market the same as the actual price refiners are paying?

19 views

eli5: is the price of crude oil i see on the futures market the same as the actual price refiners are paying?

In: 12

Maybe.

Unlike speculators, refiners buy oil on commodities contracts planning to actually receive oil. Refiners are a small fraction of actual oil contract order flow, most transactions on the futures market are between speculators.

The oil that’s being refined today was purchased on prior contracts, so there are time-driven factors as well.

In many cases, they aren’t. For stuff like oil, electricity etc. , there are two big markets. The spot market for customers(refiners) who want things NOW and the future market where customers (refiners) want to make contracts for future transactions.

The spot market doesn’t contain an extra tax for getting assurances. You simply pay the current price for the crude oil. If I want to get X liters of oil in the future, some seller might do it but wants to get extra money for assuring you to deliver the oil in let’s say 1 year. The oil price might be higher, the oil price might be lower. One party is always winning in this deal, but the seller will charge you a bit of extra money to put this deal more in their favour.

Most of the times, the actual prices are wastly different. Refiners could pay the price of the spot market since they didn’t make any contracts preemptively. If they made contracts on the future market, it depends incredibly on the market sentiment, on the time span you want to get your oil delivered etc. If you as a refiner got a contract one year ago for today, you certainly got a deal in your favour (who could have anticipated such a rise one year ago?). If you made a contract one month ago for today, not so much. Everyone knew about the oil shortage already.

The crude oil prices in the futures market is for a specific quality of oil delivered at a specific location at a point in time. There is virtually nobody who actually gets this, most of them is anyway based of obsolete oil fields which have been depleated. The actual oil being traded is of different quality which affects the price and there are costs of transport and storage of the oil for the final delivery. But the market price is used as an index for what the price is actually going to be. So the refinery might show up to an oil producer with a futures contract that is expiring and the producer may charge more because their oil is of higher quality but then reduce the cost because they want it delivered closer to the oil field then the futures contract say.