Quote:
Originally Posted by SirKeats
so a barrel trading for 150 bucks (or whatever) on the stock market doesn't mean that the suppliers HAVE to sell it for 150 bucks, but it indicates to them that this is what they can get for a barrel so they adjust their prices accordingly?
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Ttoyoda’s link provides a good little summary.
If I sell you a contract to deliver X barrels of oil on future day Y for $150/barrel. Whether the market price on day Y is $150 or not both sides must execute the contract for $150/barrel as it is a legal contract, both you and I have speculated what oil will be worth on that future day. This need not be a bad thing. In the case of a farmer selling his future on his crop, it allows him to put some money in his pocket to cover his farming expenses instead of taking out a loan so he is a beneficiary of the system. An example of a buyer might be a cereal company like Kellogs that knows they will need a continuous stream of materials to make their product and this guarantees them that the product will be delivered on day Y and allows them to lock into a price they can live with so they are a beneficiary of the system as well. What happens if the farmer has a crop failure and the farmer can not deliver? He must then find someone who will sell him a future contract or find some crop that is not in the commodity system to pick up to cover his contract. This is what causes the day to day commodity prices to move and why you see a shock to the price of oil when a pipeline goes down. People are scrambling to cover their futures which they are obligated to deliver.