if the seller of the futures contract wanted not to be at risk for the future delivery of oil at his agreed price, he could if oil was cheaper at the spot cash price buy the oil, store the oil for a fee, pay interest on money spent, and pay insurance. Hopefully these costs plus the spot present oil price he paid would be less then the future price someone agreed to pay him.
I may be missing something, but why "hopefully"? Everything you mentioned are known quantities. If, say, someone will pay you $160 a barrel for a 6 month out contract, and the costs of storing etc. would be $10, and you can buy spot oil at $140.... So, you would be making not a "hopefully", but a guaranteed profit of $10 a barrel.
Clearly, in a liquid market any such opportunities would be arbitraged away very swiftly. This illustrates how futures prices in commodities are "anchored" to the actual spot price, which is determined ultimately - and for the most part solely - by supply and demand. |
