How to gain a pricing advantage with futures markets

The launch later this year of a freight futures market will give industry participants better insight into rate management

For the initiated, future markets can be a daunting topic. The concept of buying and selling something at a future date can be confusing to many. In fact, there are many professional traders that avoid futures markets altogether.

Whether you are a futures trader or not, though, the futures markets play a critical role in the physical marketplace. Take oil, for instance. There is a physical marketplace of both consumers of oil and producers of oil. Oil’s price is influenced by a number of physical factors including consumption, production and inventory.

There is also an oil futures market where traders buy and sell oil based on projected price. Oil futures contracts typically mirror the physical market’s attributes and the expectation of those attributes at set periods in time, i.e., 3 months, 6 months, 1 year, etc. But, as the U.S. Energy Information Agency explains, when futures prices are not aligned with real-world prices, market forces intervene.

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“If market expectations indicate a change toward relatively stronger future demand or lower future supply, prices for futures contracts will tend to increase, encouraging inventory builds to satisfy the otherwise tightening future balance,” EIA notes. “On the other hand, a sharp loss of current production or unexpected increase in current consumption will tend to push up spot prices relative to futures prices and encourage inventory draw downs to meet the current demand.”

In other words, a futures market will react to the underlying fundamentals of its physical market because in the end, the futures price is linked to the physical market. In this case, there is a physical commodity being exchanged to settle those futures contracts – barrels of oil. Many futures contracts, though, do not involve a physical commodity changing hands. That is true of the upcoming freight futures contracts being launched later this year by TransFX.

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