Quote Originally Posted by rspears View Post
As I understand it, that "futures" contract is the right to buy some set amount of (insert commodity) at a set price, such as a guy may pay $500 for the right to buy 10,000 barrels of oil six months from now at $125/barrel, even if oil is selling for $100/barrel today. He's betting that prices are going to rise above $125/barrel, and is willing to bet his $500 on that fact. On that date he exercises his option, and the person who sold the futures contract must turn over 10,000 barrels of oil in return for payment of $1,250,000. If the seller bought that oil months before when it was at $75/barrel he pockets a tidy profit of $500,000 less his costs for storage. However, if he "sold short", banking on the fact that the price of oil was going to fall over the next six months and he really does not own 10,000 barrels of oil he must then buy that amount on the open market, and turn it over to the futures guy. If the price that day is below $125/barrel then he makes out (he only buys if the guy exercises the futures conract, which he won't if he can buy on the open market for less), as he can easily fill the commitment he made and pocket a little profit. However, if he "sold short" and oil is selling for $150/barrel then he puts out $1,500,000 to buy the 10,000barrels, and turns around and sells it for $1,250,000 - a loss of $250,000 for playing the futures market. The guys buying futures risk some money speculating, but the guys who "sell short" on big buys are dancing with the devil, IMO.

The operative word in your dissertation is "storage" or the lack there of as the "speculator/commodities trader" doesn't store anything except the paper he/she is shuffling.
It really galls me that some clown sitting on Wall Street can, on a whim or someone farting in the Middle East can instantly drive the price of oil up irrelevant of supply and demand. And comparing farm futures to oil futures is like comparing apples to oranges as the oil producer is not borrowing on his future "crop". Don't get me wrong, I'm all for free market, but it does bother me greatly that a hand full of clowns can determine the market price with total impunity.