As the rally in oil prices gathers steam, it’s important to place the quoted prices in context.  The price most frequently quoted for “crude oil” is the front-month West Texas Intermediate contract.  So, today’s oil price of “$52 per barrel” is the value of the contract for delivery at the hub in Cushing, OK by November 30th, a contract that settles on October 20th. The lag between the settlement date and the delivery date represents the necessity to transport the physical commodity.

So, there’s really no “spot” price for crude in the Western world, as it doesn’t settle on a day of/cash basis.  U.S. oil producers are compensated for their output based on the value of the futures contract for the month corresponding to the delivery of the oil.  Of course those producers use futures along the forward curve to hedge production in upcoming periods.

That type of market doesn’t necessarily exist around the world.  Saudi Arabia, for instance, sells its crude to China on a price that it sets monthly with an eye on oil futures, specifically for Brent crude. Other, less-developed oil nations sell at prices that more closely resemble a true spot market price.

 

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