Oil futures are contracts that lock in a price today for oil that will be delivered (or settled) at a specific date in the future. Each contract represents 1,000 barrels of crude oil, and they trade on exchanges like the New York Mercantile Exchange (NYMEX). Buyers and sellers use them either to hedge against price swings or to speculate on where oil prices are headed.
What an Oil Futures Contract Actually Is
When you buy an oil futures contract, you’re agreeing to purchase 1,000 barrels of crude oil at a set price on a set date. The seller agrees to deliver it. Neither side pays the full value of the oil upfront. Instead, both the buyer and seller post a margin deposit, typically a few thousand dollars per contract, as a good-faith guarantee. For WTI crude oil futures on the NYMEX, maintenance margin runs around $4,000 to $4,400 per contract, a fraction of the roughly $60,000 to $70,000 that 1,000 barrels of oil might actually be worth at current prices.
The smallest price move on a WTI contract is one cent per barrel. Since each contract covers 1,000 barrels, that one-cent move equals $10. A one-dollar swing in oil prices means a $1,000 gain or loss per contract. This leverage is what makes futures attractive to speculators and risky for anyone who doesn’t understand the math.
WTI crude futures trade nearly around the clock, from Sunday evening through Friday afternoon Central Time, with a one-hour daily break. That continuous trading means prices respond in real time to geopolitical events, inventory reports, and weather disruptions.
WTI vs. Brent: Two Benchmarks, Two Markets
Most oil futures trading revolves around two benchmarks: West Texas Intermediate (WTI) and Brent crude. WTI comes from U.S. wells and is delivered by pipeline to a storage hub in Cushing, Oklahoma. Brent comes from North Sea oil fields and is water-borne, making it easier and cheaper to ship globally. Both are classified as “light, sweet” crude, meaning they have relatively low density and low sulfur content.
Before 2011, the two prices tracked each other closely, with Brent typically trading at a slight discount to WTI. That relationship flipped in early 2011 when pipeline bottlenecks near Cushing caused a glut of landlocked WTI supply. The spread between the two peaked at about $25 per barrel in late 2011, with WTI trading well below Brent. Since 2013, the gap has narrowed, but Brent generally remains the higher-priced benchmark because its seaborne supply makes it a better reference point for international oil trade.
How Prices Move Before Expiration
Futures contracts don’t just sit at one price until delivery day. They trade continuously, and their prices shift based on supply expectations, demand forecasts, inventory data, and broader economic signals. Two terms describe the shape these prices take across different delivery months: contango and backwardation.
In contango, futures contracts for later months cost more than the current (spot) price. This is the more intuitive pattern. It reflects the real costs of holding physical oil: storage tanks, insurance, and financing. If it costs money to store oil for three months, it makes sense that a contract for delivery in three months would be priced higher than today’s oil.
In backwardation, the opposite happens. Near-term contracts are more expensive than contracts further out. This typically occurs when current supply is tight and buyers are willing to pay a premium for oil right now. There’s an economic concept behind this called the “convenience yield,” which is essentially the value of having physical barrels on hand to keep refineries running. When inventories are low, that convenience is worth a lot, pushing spot prices above future prices. When storage tanks are full, the convenience yield shrinks and the market tends to drift into contango.
These curves aren’t static. They shift constantly as traders reassess supply and demand, and a market can flip from contango to backwardation within weeks.
What Happens When a Contract Expires
Every futures contract has an expiration date, and what happens at that point depends on the contract type. WTI crude oil futures are physically settled, meaning that if you still hold the contract at expiration, you’re obligated to take delivery of 1,000 barrels of oil at Cushing, Oklahoma (if you bought) or deliver them (if you sold). Some financial products like certain index-linked contracts use cash settlement instead, where the difference between the contract price and the final settlement price is simply paid in cash with no oil changing hands.
Most speculators never intend to take delivery. They close their positions, selling the contract before expiration to lock in a profit or cut a loss. The contracts then “roll” to the next month. This rolling process is routine, but it can create unusual dynamics when circumstances aren’t routine.
When Oil Went Negative: A Lesson in How Futures Work
On April 20, 2020, the front-month WTI futures contract did something no one had seen since trading began in 1983: it went negative. Sellers were essentially paying buyers to take oil off their hands. The price briefly plunged below zero.
The cause was a collision between physical delivery rules and a real-world storage crisis. The COVID-19 pandemic had crushed global oil demand, and crude was piling up everywhere. Between mid-March and early May, commercial inventories at Cushing rose by 27 million barrels, reaching 83% of the hub’s working storage capacity. Traders holding expiring contracts suddenly faced the prospect of taking delivery of oil they had nowhere to put. Desperate to avoid that outcome, they sold at any price, including negative ones. The next day, Brent crude fell to $9.12 per barrel, its lowest price in decades, though it never went negative because its cash-settlement mechanism didn’t create the same physical delivery panic.
The event illustrated a core truth about oil futures: these are contracts tied to physical commodities with real-world constraints. Storage capacity, pipeline logistics, and delivery deadlines aren’t abstractions. They can move prices in ways that pure supply-and-demand analysis doesn’t capture.
Who Trades Oil Futures and Why
Oil futures attract two broad categories of participants. Hedgers are companies with real exposure to oil prices. An airline might buy futures to lock in fuel costs for the next quarter. An oil producer might sell futures to guarantee revenue on barrels it hasn’t pumped yet. For these participants, futures are insurance against price swings.
Speculators, on the other hand, have no interest in owning oil. They’re betting on price direction. A trader who expects oil to rise buys contracts (goes long) and plans to sell them at a higher price before expiration. One who expects prices to fall sells contracts (goes short) and hopes to buy them back cheaper. Speculators provide liquidity, making it easier for hedgers to find counterparties, but they also amplify price movements during volatile periods.
Large institutional investors, including pension funds and commodity-focused exchange-traded funds, also participate. These funds typically hold futures contracts and roll them forward each month, which means they’re constantly selling expiring contracts and buying the next month’s. In a contango market, this rolling process costs money because they’re consistently selling cheaper near-term contracts and buying more expensive later ones. That drag on returns is one reason commodity ETFs sometimes underperform the headline price of oil over long periods.
How Margin Calls Work
Because futures use leverage, your account is “marked to market” at the end of every trading day. If the price moves against your position and your account balance drops below the maintenance margin threshold, you’ll receive a margin call requiring you to deposit more money. If you can’t meet it, the exchange or your broker will liquidate your position.
This daily settlement process means losses don’t accumulate silently. You feel them in real time. A $3 drop in oil prices costs $3,000 per contract. If you hold 10 contracts, that’s a $30,000 loss in a single session, far more than the margin you posted. Futures trading can generate losses that exceed your initial deposit, which is why exchanges enforce margin requirements so aggressively.