The Future Prices of Oil
By: Sam Vaknin, Ph.D.
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The price of oil is no longer an important determinant of the economic health of the West.
Today, there are forward contracts, which allow one to fix the price of purchased oil well in advance. There are options contracts which can be used to limit one's risks as a result of trading in such forward contracts.
In other words:
If one loses money on the forward contract because the purchase price fixed in the contract is higher than the market price at the time of delivery (=one must pay more than the market price according to one's obligation in the contract) - one makes a profit on the options contract that is similar to the loss on the forward contract.
Thus, if one uses forwards plus options - one fixes a price in the future that can be not too far from the market price at the time of delivery. Such financial positions require sophisticated management and day to day maintenance of the forwards and options positions, though.
Fixing Oil Prices Inside Countries
Most countries in the world have three systems of fixing prices inside their markets:
The prices are fixed every 3 or 6 months based on the cost of oil at a certain port of delivery. In Israel, for instance, the price of oil fluctuates every three months according to the price of oil delivered in certain Italian ports (where Israel gets most of its oil delivered). This is an AUTOMATIC adjustment.
In other countries the prices are fixed by the competent Ministry in accordance to the ACTUAL costs of the oil (importing, processing and distribution) + a fixed percentage (usually 15%). This is called a COST PLUS basis pricing method.
The Price Trends of Oil
The international price of oil is determined by the following factors:
(NEGATIVE=depresses prices, POSITIVE=increases prices)
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