A futures contract is an agreement traded on an exchange to buy or sell fuel at a set price on a set future date. Buyers use it to lock tomorrow’s price today.
Futures trade on public exchanges, where many buyers and sellers meet. Each contract fixes a price now for fuel to be delivered or settled later. The contracts cover standard products like crude oil, gasoline, and heating oil, in standard amounts, so anyone can trade them on the same terms.
They do two jobs. First, they let a company lock a price ahead of time, which is the basis of hedging, trading the chance of a windfall for protection from a painful spike. Second, the prices being traded show where the whole market thinks prices are heading, so the trade reads futures like a forecast.
Futures sit at the top of the fuel price ladder. The spot price, the price for a bulk load bought right now, moves with them, the rack price at the terminal moves off spot, and the price at the pump follows from there. Most jobbers never trade futures themselves, but the number still rolls downhill into what they pay.
In useWhen futures jumped on a refinery outage, the jobber knew the spot and rack prices would follow within days and warned its dealers their cost was about to climb.
See also Hedging, Spot price, Rack price