In times long past, the nature of financial transactions in the worldwide crude oil market was very different than the way it looks in today’s modern times. With the advent of faster means of communication, as well as shifting attitudes towards how transactions should be handled, an increasingly cost-effective system for managing the buying and selling of oil has evolved. This has not only increased the profitability of these transactions, but has also become a necessity in a world where the demand for oil increases at faster and faster rates every year.
Short Oil or Spot Market Oil
When a company is looking to buy or sell quantities of oil in the near future, it will make use of a contract in what is called the spot market. Quite often these “on-the-spot” transactions will be consummated within a few short weeks and are an effective way for oil sellers to manage the supplies that they either have readily on hand, or that they expect to have in their possession within a short time. Because these transactions affect the real inventory numbers of an oil company, they are frequently referred to as taking place in the physical market.
When a company wants to get access to an oil supply quickly, it will take a spot contract so that it knows with certainty that the oil it needs to acquire is readily at hand. Prices on this market are dependent on the individual factors of current supply and demand, and can fluctuate significantly due to immediate market conditions.
Triple Diamond Energy Corp. does not supply short oil but the other type of oil transaction; the long term oil transaction.
Long Term Oil Transactions
The spot market is only one way that oil transactions occur. The other is called the futures market, where long-term deals regarding the purchasing and sales of quantities of oil occur. A wholesale buyer will make a contract with an oil producer like Triple Diamond Energy Corp. for a purchase of a specific amount and quality of oil at a future date, and the seller will deliver at the time and place specified in the contract.
These contracts take place in a different environment than the one dictated by the immediate conditions of supply and demand. This market is more like the stock market, where buying decisions are based on people’s expectations of what the future holds for oil commodity prices. Because the fluctuations in prices are based on a more complex framework of production capacities, political considerations and economic conditions, it is often referred to as the financial market rather than the physical market.
By using each kind of transaction vehicle when appropriate, different companies help ensure that oil arrives where it is needed at a price that is satisfies all parties involved in the sale, each and every day of the year.