First, we need to provide a glimpse of how futures contracts work in contrast to the spot market. On the one hand the spot market is defined as "the market where financial instruments, such as commodities, currencies and securities, are traded for immediate delivery".[2] On the other hand the futures market is "an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Futures are exchange-traded derivatives contracts that lock in future delivery of a commodity or security (the underlying asset) at a price set today"[3]. An example of a future contract in the context of crude oil is an agreement to buy 1000 barrels in 1 month at a predetermined price set today, or in other words to be "long" on a 1-month future contract for 1000 barrels. One of the main advantages to buy or sell this type of derivative is hedging. Futures contracts are designed to neutralize the market risk by fixing the price that the investor will pay or receive for the underlying asset.[4] Furthermore, one last important feature of futures contracts, especially for commodities, is the notion of delivery arrangements. This is the place where the delivery of the underlying asset will be made, and it must be specified by the exchange.[4] Therefore buyers who maintain their position have to pick up the underlying at the delivery point.

Second, let's get into the oil market. There is an important range of different crude oils, each with their own prices and characteristics [5](API gravity, sulphur content, . . . ) : crude oil from Saudi Arabia does not have the same price than American or Russian oil. Each is traded in its respective spot market in which there is an immediate delivery of barrels (in reality "immediate" means 1 or 2 days, as oil barrels cannot be teleported). The spot market only concerns commercial players (producers and industries) since there is a true exchange of barrels at the end of the transaction. In order to have a reference price at which to buy or sell crude oil, traders rely on the oil futures market. This one is more particularly characterized by 3 main benchmarks : The Brent (for oil in North Sea) exchanged at the ICE Futures, the WTI (for American oil) exchanged at the New York Mercantile Exchange, and the Dubai crude (for Asian oil).[6] When a newspaper reports that oil is selling for $50, it refers to these benchmarks, considered as industry standards. If you are interested in the different oil markets, you can take a look at this website : https://oilprice.com/oil-price-charts/ .

In the crude spot market, when one enters a position there is a trade of barrels of oil. Only commercial players (oil users) are willing to participate in this exchange place. However, the actors in the oil futures markets are more diverse since there is a gap between the moment when you enter a position and the maturity of the contracts (that could be months, semesters, or even years). Therefore, in addition to commercial users who use futures contracts to hedge their positions, this gap allows non-commercial players - who do not want to receive a barrel at home - to enter in the market and to speculate on the price of the underlying.[7] Indeed, arbitrageurs who are not interested in any physical delivery of oil may take short or long positions depending on the expected change in the price of oil in order to make a profit. The majority of the futures contracts are sold before expiry date and there are very few contracts that lead to an exchange of goods.[8]

There is a special case that we did not mentioned yet, what happens if a speculator maintains its position in a future contract until maturity, i.e the date of delivery ? The first option would be to take the physical delivery on the settlement date of the contract as described above. The second is called the "cash settlement". In this method the long position of the contract does not take the delivery of the underlying but receives or pays the net cash depending on whether the spot price is higher or lower, respectively, than the future price on the settlement date. Let's take an example. A speculator bought a 1-month oil future contract on June 10th for a delivery on July 10th at $30. By doing this, he hopes that the spot price will be higher than $30 in July. Suppose that on July 10th the spot is equal to $25. The speculator (who does not need a barrel of oil) lost his bet. In that case, he will virtually (because all of this is automatized) ask the seller to keep the barrel and to sell it on the spot market and will give an additional $5 per barrel since the seller will only sell its oil on the spot for $25. Of course, all of this could have been the other way around and a speculator could have sold (we say that he takes a "short" position) a contract to sell oil one month later. This illustrates something important in futures commodity markets : supply and demand are biased by speculators. There are investors who buy contracts without real needs of the underlyings and others that sell contracts without truly having the goods. Fattouh, Kilian and Mahadeva (2012) argue that the financialization of oil futures markets and the role of speculation in the price volatility of this commodity is still subject to debate among economists.[9]