I don't know whether this forum is still interested in publishing my precious research, but if you know the journal 'The Geopolitics of Energy', the latest issue contains an article of mine on oil, with a brief discussion of oil futures. I intend to expand that discussion and submit it to this forum. Maybe you will get a chance to read it. And incidentally, oil futures will not "be back" because they have not gone anywhere. They are indispensable.

I'm just a simple engineer, but it's been my experience that if something is so "complicated" that only a few can understand it, then maybe it should be avoided.

I sure hope the derivative markets will be subject to significantly tighter regulations to minimize the abuses that has unquestionably led to a number of economic downturns.

Your student foreover Yasser

I think they should ban the trading of oil in the futures market and/or regulate the big brokers so that they can not manipulate and bring down companies and countries. I do not expect it to happen any time soon, since these brokerage companies got the tax payer money and are back in the game manipulating everything from stocks to commodities.

Prabhakar, few truly understand how easily the market is manipulated and often the big locals make similar moves to push the market in the direction support their positions. I have my thoughts and beliefs on everything especially derivatives. For five years I traded energy; however, I must have really sucked at it since I have been able to find employment in the field again, but I did make a lot of money of money for my employer and I enjoyed it. I have continued to follow energy trading as closely as someone not actively trading practically can. Formerly I purchased gas derivatives (future contracts) to lock in the spark spreads on the generation physical assets I traded around. I found it interesting how that certain parties always seemed to be “on top of the market” buying power just seconds before gas made a jump and selling just seconds before gas took a dive. What was going on was simple a large player would buy a bunch of power and gas at the same time. These spec traders knew that the power suppliers, utilities and most of their IPP off shoots, were risk adverse and had trading rules requiring hedged positions. So the scale trader purchased gas and power which predictably pushed both markets into higher prices. The trader knew the gas market would be further stimulated by the multiple parties he/she purchased power from coming into the gas market. The scale trader would then sell the gas just purchased at a higher price making his first profit on the deal just minutes old. With rare exception when gas goes up so does power. He/she would then sell some of the power at a profit the amount depending more on liquidity than any other single variable. Worst case the trader held some relatively safe fixed price power. The details here are really not relevant the key point is that many players have enough financial strength to repetitively push the markets in their favor. There are other players with equal scale that could in theory offset these actions but in the real world they follow the lead and support each others efforts and both make money. I am hard pressed to see these actions as a service to the market as the articles author implies.

And G. Habakkar, you say that speculators took the oil price to $147/b. That sounds a little like our friend Mr Bill O'Reilly, who claimed that the high oil price was due to "little guys" in Las Vegas. Contrary to my earlier belief, I'm willing to admit that speculators played a small part in boosting the oil price to that level, but the main force was demand outrunning supply, as some important OPEC countries began to think more about the future prosperity of their citizens instead of the satisfaction of the oil the motoring community in Europe and North America. The government of Saudi Arabia made it quite clear almost 30 years ago that oil was too important to sell at bargain basement prices, although they could not avoid doing something like that for many years...

I have no reason to regard myself as a friend of speculators, but the simple fact of the matter is that the world is probably better off with a smooth running oil futures market than without one. Hedging oil - and some other things - without considerable speculation doesn't make a lot of economic sense. And yes, their are a lot of shady characters in or around the derivatives market, but there are shady characters everywhere these days. A top executive of the Swedish Red Cross was just caught with his hand in the cookie jar, and the electricity futures markets are (or at least were) pure scams..

Rahul, excellent point!!! My first recollection of what you are saying were the infamous Hunt brothers.

Jerry, you don't know what you are talking about. By your definition, wheat futures are not a derivative. ??? Yes, you can take delivery on a wheat futures contract, I have done so. For that matter, NYMEX listed oil and gas futures contracts would not be derivatives.

Or simply for you and the professor, futures contracts can be on a physical commodity with someone eventually taking delivery, but not all futures contracts are derivatives. A wheat futures derivative is a financial instrument between counter parities that based on the price of wheat at a specified time or time frame one party or the other will owe money; however, no one has to worry about delivery. The profit or loss is derived from the underlying value of the commodity it is based on. If one is a wheat farmer one can sell wheat futures with a delivery point. Anyone can also sell wheat future derivatives contracts based on the futures price of wheat at a certain delivery point. If one is not a wheat farmer and sells wheat futures then one will have to purchase wheat to deliver on the agreed on date unless the counter party agrees to a cash settlement. However all three, buying wheat, settling with the counterparty, or having done a wheat futures derivate is financially equivalent. I assume it is this aspect that confuses a lot of people. The futures derivative is cleaner it will be settled for in cash and no one has to worry about filling their garage with wheat, oil, gas, or megawatts.

One last thing if you are going to correct someone it is generally best to at least be correct. I hope this clarifies derivatives for you.

You walk into and through the economics library at Uppsala University until you come to the stacks. There you stop, and do a half right face. You are now facing a large number of finance books, and every one of them calls oil futures derivatives. THE UNDERLYING STRANGELY ENOUGH IS OIL!. I repeat: Oil futures are derivatives - and they are derivatives whether they are cash settled or delivered if held to the maturity (expiry) date. I think that you should give your finance teacher a call and find out what she was smoking when you got a certain lecture.

About filling their garage with wheat, oil....megawatts, that sounds to me like a mistake I made about thirty years ago in Geneva when I began working with this topic. Oil will NOT be delivered to the garage of your house in Beverly Hills, but to East Texas or New York Harbour if indeed a delivery takes place. Given a liquid market a few days before this famous delivery is supposed to take place you could reverse (offset) your (derivatives) contract.

Do yourself a favor and look at one of my textbooks, or perhaps better the textbook by John Hull. I can say though that a couple of the things you say make sense, but you need to police up the details.

I hope that this clarifies one of the oil derivatives for YOU..

I suggest that you stay away from EIA definitions and check out the book by John Hull.