How is the Price of Oil Generated?

You have noted the price gap on oil market, occurring on Monday, for sure. The reason was the rollover of May contract to a June one.

 

At the beginning of this week, we could see some market news websites informing about different oil prices as you can see in our platform. The reason is that the how a different price of oil with the closest expiration date at a commodity exchange. The actual contract will expire on Tuesday however, rollover is happening little earlier, but it’s connected to a drop in liquidity and to the avoidance of unexpected moves. Majority of the markets has already rolled its trading into the following month, including us. 

 

What prices you can find?

Spot – Market where you can buy or sell physical oil instantly. It’s non-centralised and consists of respective market makers, banks and dealers. Futures – Market used by brokers for the hedging of their actual positions on commodity exchange and for the speculation on future price development. Both markets are interconnected while the price of futures mirrors spot price + costs for storage and insurance.

 

How is our price generated?

In case of certain brokers, you could see different prices than our ones. Each broker has a different approach to price and some of them use direct price copy of futures contract. We show the spot price you can buy oil barrel for. This is an over-the-counter CFD, determined by liquidity provider on the basis of the most traded futures contact, most frequently the one with the earliest delivery date (except for situation when a rollover to contract of the next week is happening). Spot price is derived thereof.

 

What is Rollover

Rollover means a smooth transmission from one contact period to another. On futures contracts, positions are closed in one month and opened on another one. 
 
Price difference between actual contracts is higher than under standard conditions. In fact, it’s the biggest in history. Therefore, after the rollover, a bigger price gap may occur and at the same time, liquidity providers may initiate an increase in swaps along with spot prices. We see it even today and with regard to such big difference between spot price of oil and the price of the biggest, June futures contract, prices of swaps are now much above standard ones. 
 
In particular traders with pending orders and pre-set stop losses should pay attention to rollover to mirror the actual market prices, while for the other traders, there aren’t many changes. Conversely, in case of futures traders, their contracts will expiry and a rollover to another month ensues, making a big difference comparing it to spot market. 

However, it’s not needed to be worried about the losses occurring on the basis of rollovers as the price difference will be balanced by swaps. After the rollover to a new underlying futures contract, there will be a jump in “spot price,” but a smaller one as in case of futures and the difference will be compensated by swap. Therefore, it’s in fact impossible to speculate and make money on rollover.

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