The Forward Marketfor Oil

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Introduction
The price of cover is an important macroeconomic variable.
It reflects demand pressures in the global economy, and
potentially impacts directly on the inflation rate, at least
in the short run. This oblige looks at how a particular
section of the market for anele operates: the forward
market.
In February 2006, the price of anele for delivery in spite of appearance the
next month was around $60 per barrel, roughly triple
the price of two years earlier. The rise largely reflects
significant growth in global demand for crude at a time when
estimated short-term spare production contentedness was at
historical lows (Chart 1). The rise in the price of oil for
near-term delivery has been accompanied by an unusual
increase in the price of oil for delivery further in the
coming(prenominal), suggesting that high prices are judge to be
a relatively long phenomenon. But a higher
future price of oil ought to allow producers to hedge
future production, thus bringing somewhat higher future
supply by increasing expected returns on investments in
oil production. Un little demand growth continues to
surmount supply growth, this process ought eventually to
reduce the price of oil for immediate and future delivery.




In this article we explore the interrogate of whether the
forward market for oil may be less than fully efficient in
allowing market participants to hedge future production.
We consider first how the forward market for oil
operates, both on and off exchange. We then go on to
contend why there is not more hedging activity. It is
argued that the neediness of hedging may reflect failures in
forward markets for different goods and services rather
than in the forward market for oil. In addressing these
issues, we have consulted a range of market participants
and interested parties. These acknowledge oil producers,
futures exchanges, investment banks, hedge funds,
academics and representatives from official institutions.
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