What is an oil futures contract?

An oil futures contract is a standardised financial agreement to buy or sell a specific quantity of crude oil (typically 1,000 barrels for WTI/NYMEX contracts) at a predetermined price on a future delivery date. Futures allow producers to lock in a selling price and refiners to lock in a buying price, managing price risk. Most contracts are closed out before delivery — the oil is settled financially rather than physically.

How do oil futures affect petrol prices?

Petrol pump prices are closely linked to crude oil futures prices because refiners buy crude on markets where futures are the primary price benchmark. When the front-month WTI or Brent futures price rises, refinery input costs rise, and refiners pass this on through wholesale and then retail fuel prices. The transmission is not instant — it typically takes 2–6 weeks for a crude price move to fully appear at the pump.

What is contango and backwardation in oil futures?

Contango is when futures prices for later delivery months are higher than the current (spot or front-month) price — the market expects prices to rise, or storage costs are being priced in. Backwardation is the reverse: later delivery months are cheaper than the front month, indicating tight current supply or strong near-term demand. Backwardated oil markets are typically associated with physical tightness.

What is the difference between WTI and Brent futures?

WTI (West Texas Intermediate) futures trade on the CME/NYMEX exchange and are settled at Cushing, Oklahoma. They represent North American crude supply and demand. Brent futures trade on the ICE exchange and represent Atlantic Basin crude, used as the benchmark for roughly two-thirds of global crude trade. Brent is the most internationally relevant crude benchmark.

Who trades oil futures?

Oil futures are traded by a range of participants: oil producers (e.g. national oil companies, independent E&P firms) who hedge their output; refiners who hedge their input costs; airlines and shipping companies hedging fuel costs; commodity trading firms and banks taking speculative positions; and financial investors gaining oil price exposure through ETFs and funds. Most volume is from financial market participants rather than physical delivery.

Futures Contract

A standardised agreement to trade a commodity at a set price on a future date — the mechanism that links crude oil markets to pump prices worldwide.

Definition

A futures contract is a legally binding agreement to buy or sell a standardised quantity of an asset — in energy markets, typically crude oil — at a price agreed today, with delivery (or cash settlement) on a specified future date. Futures trade on regulated exchanges, most notably the CME Group's NYMEX (for WTI) and the Intercontinental Exchange, ICE (for Brent crude).

The standard crude oil futures contract is for 1,000 barrels (42,000 US gallons). Prices are quoted in US dollars per barrel. Contracts are listed monthly for delivery up to several years into the future, though liquidity concentrates in the nearest one or two months (the "front-month" contract).

How oil futures work

A futures contract has two sides: the long (buyer, agreeing to take delivery) and the short (seller, agreeing to deliver). The exchange acts as central counterparty, eliminating default risk via daily mark-to-market settlement and margin requirements.

Step	What happens
Contract entry	Buyer and seller agree a price for 1,000 bbl of WTI delivered at Cushing, Oklahoma, in month X
Initial margin	Both sides deposit a performance bond (~3–8% of contract value) with the exchange clearinghouse
Daily settlement	Each day the contract is repriced. Gains are credited to the winning side; losses are debited. Margin calls apply if balances fall below maintenance levels
Expiry / close-out	~95–98% of WTI contracts are closed before physical delivery. The buyer sells back the contract; positions cancel. Only a small fraction result in actual oil changing hands
Physical settlement (if held)	Holder takes or makes delivery of crude oil at Cushing. Brent uses a "cash settlement" mechanism based on the EFP (exchange for physical) market

The daily mark-to-market mechanism means futures prices instantly incorporate new information — geopolitical events, inventory data, demand forecasts — and transmit this through the supply chain to wholesale and retail fuel prices.

WTI vs Brent futures

Feature	WTI (NYMEX)	Brent (ICE)
Exchange	CME / NYMEX (New York)	ICE (London / Atlanta)
Crude grade	West Texas Intermediate — light sweet	North Sea blend — light sweet
Delivery point	Cushing, Oklahoma	Cash settlement (EFP mechanism)
Contract size	1,000 barrels	1,000 barrels
Global trade share priced against	~30% (North America focus)	~65–70% (global benchmark)
Typical spread	WTI often $2–5/bbl below Brent	Reference

The Brent-WTI spread reflects logistics differentials (US landlocked Cushing vs international seaborne Brent), quality differences, and relative US vs global supply conditions. During the US shale boom (2011–2014) the spread widened to $20+/bbl as Cushing filled up; after the US crude export ban was lifted in 2015 the spread narrowed substantially.

Contango and backwardation

The futures curve plots prices for contracts across different delivery months. Its shape signals market expectations and physical conditions:

Curve shape	Definition	What it signals
Contango	Future months priced higher than spot / front-month	Ample near-term supply; storage costs are priced in; market expects tighter conditions later
Backwardation	Future months priced lower than spot / front-month	Tight near-term supply; strong prompt demand; storage is being drawn down
Flat curve	Little price difference across months	Balanced market; uncertain direction

During the COVID-19 demand collapse in April 2020, the WTI front-month contract briefly traded at negative prices (−$37/bbl) as storage at Cushing neared capacity and physical holders could not find buyers — an extreme contango event. Conversely, periods of strong demand growth (post-COVID recovery, 2021–2022) saw sharp backwardation as the market priced near-term supply tightness.

How futures prices affect pump prices

Futures markets set the crude price signal that flows through the supply chain:

Refiners purchase crude oil at spot prices closely linked to front-month futures
Refinery output (petrol, diesel, jet fuel) is priced at crack-spread differentials above crude
Wholesale fuel prices move with crude within days
Retail pump prices follow with a lag of 2–6 weeks (longer in markets with regulated pricing or government subsidies)

This lag explains why pump prices often seem "sticky" on the way down compared to on the way up — retailers may be holding higher-cost inventory while crude is falling. Governments use fuel subsidies or excise duty adjustments to dampen the pass-through from crude futures to retail prices. For context on how large that crude component is, see what makes up the price at the pump.

To compare current retail prices across countries — which reflect both current crude futures levels and country-specific tax and subsidy policies — use the fuel price explorer.

Hedging with oil futures

The primary economic purpose of futures markets is hedging: allowing companies with physical exposure to oil prices to transfer that risk to willing counterparties.

Producers (oil companies, national oil companies) sell futures to lock in a floor price for their output, protecting revenues if prices fall
Refiners and airlines buy futures to lock in their input costs, protecting margins if prices rise
Speculators and financial investors provide the liquidity that makes hedging possible, taking the other side of hedgers' positions in exchange for expected returns

Large producers (e.g. US shale companies) have at times hedged a majority of their 12-month forward production, which can slow their response to low prices — already-hedged production remains profitable even when spot prices fall, maintaining supply when the market is oversupplied. This dynamic has been a recurring factor in OPEC+ strategy discussions. For more on how supply decisions affect prices, see OPEC+ production strategy 2026.

Frequently asked questions

What is an oil futures contract? An oil futures contract is a standardised financial agreement to buy or sell a specific quantity of crude oil (1,000 barrels for WTI/NYMEX) at a predetermined price on a future date. They trade on regulated exchanges, allow producers and refiners to hedge price risk, and most are closed out financially before physical delivery.: An oil futures contract is a standardised financial agreement to buy or sell a specific quantity of crude oil (1,000 barrels for WTI/NYMEX) at a predetermined price on a future date. They trade on regulated exchanges, allow producers and refiners to hedge price risk, and most are closed out financially before physical delivery.
How do oil futures affect petrol prices? Petrol pump prices are closely linked to crude oil futures because refiners buy crude at prices benchmarked to WTI or Brent futures. When front-month futures rise, refinery input costs rise and are passed on through wholesale to retail prices. The lag from futures price move to pump price change is typically 2–6 weeks.: Petrol pump prices are closely linked to crude oil futures because refiners buy crude at prices benchmarked to WTI or Brent futures. When front-month futures rise, refinery input costs rise and are passed on through wholesale to retail prices. The lag from futures price move to pump price change is typically 2–6 weeks.
What is contango and backwardation in oil futures? Contango is when later delivery months are priced higher than the front-month — signalling ample near-term supply and storage cost priced in. Backwardation is the reverse: later months cheaper than the front-month, indicating tight current supply or strong prompt demand. Backwardated markets are typically associated with physical supply tightness.: Contango is when later delivery months are priced higher than the front-month — signalling ample near-term supply and storage cost priced in. Backwardation is the reverse: later months cheaper than the front-month, indicating tight current supply or strong prompt demand. Backwardated markets are typically associated with physical supply tightness.
What is the difference between WTI and Brent futures? WTI futures trade on CME/NYMEX and are settled at Cushing, Oklahoma, making them the US benchmark. Brent futures trade on ICE and represent North Sea crude, used as the benchmark for roughly two-thirds of global crude trade. WTI typically trades $2–5/bbl below Brent due to logistics and quality differentials.: WTI futures trade on CME/NYMEX and are settled at Cushing, Oklahoma, making them the US benchmark. Brent futures trade on ICE and represent North Sea crude, used as the benchmark for roughly two-thirds of global crude trade. WTI typically trades $2–5/bbl below Brent due to logistics and quality differentials.
Who trades oil futures? Oil futures participants include producers hedging output, refiners and airlines hedging input costs, commodity trading firms, banks, and financial investors seeking oil price exposure. Most volume comes from financial market participants; only a small fraction of contracts result in physical delivery of crude oil.: Oil futures participants include producers hedging output, refiners and airlines hedging input costs, commodity trading firms, banks, and financial investors seeking oil price exposure. Most volume comes from financial market participants; only a small fraction of contracts result in physical delivery of crude oil.