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Oil Prices Across The US Economy

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Executive Summary: Oil prices have many effects across the U.S. economy that can have either negative or positive impacts. While an increase in oil prices helps energy companies by increasing their revenue and company stock value, a reduction in oil prices benefits other sectors such as production or manufacturing companies by reducing their operating costs. Investors, traders, and privately held companies usually purchase oil through the futures market, participating in hedging activities seeking profits on oil price changes. Depending on the investor’s stance and their predictions, oil prices in the future can be either below or above original prediction indicating a profit or a loss. Changes in oil prices also affect commercial banks and …show more content…

Drops in oil prices can positively or negatively impact different businesses involved in the oil, energy, and the manufacturing sectors. Businesses that generate their income from producing and selling oil have been negatively impacted from the decline in oil prices (Kent 2016). However, oil traders’ bank in market fluctuations as it provides opportunities to make high profit trades. Traders and speculators respond to the changes in market prices of commodities by buying and selling future contracts rather quickly once they see the fluctuations in prices (Blackwell Ch.11). These functions are important because they help balance the market. Investors, traders, and privately held companies can enter into hedging activities such as future contracts to reduce risk, which is typically the commodity price risk. Future contracts involve two parties that agree on a present day price to buy a certain commodity in the future (Blackwell Ch.11). This price could change up or down depending on market conditions and world events. Usually, oil traders bet on commodity price changes. Privately held oil trading companies, like Gunvor Group Ltd., and Trafigura Group PTE, based in London use future contracts to make profits on price discrepancies around the world (Kent 2016). A trader, who expects prices to decline could sell short a futures contract to help sustain the impact of weakening oil prices (Kent 2016). In this context, having a short position means that an oil speculator expects the price of oil to decline and will then sell a contract in the future based on current market prices with the intent to make a profit on the difference if the price at the future date is less. In contrast, a long position or buyer in a futures contract means that the speculator expects the price of oil to increase in the future ensuring a profit on

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