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Can you think of any reasons for oil on the futures market, JRV? I'm quite open minded to another perspective.



Predictable costs of raw materials.

Most manufacturers have to buy or lock in their raw materials long before they get paid by their customers. Also, most industrial orders aren't “10,000 widgets next week” but rather “100 widgets a week over the next five years, cancellable after 1 year”.

If you get a big order for widgets that use a lot of oil as a raw material (plastics, etc) you may need to price the widgets well into the future for your buyer, yet the cost of your raw materials is uncertain. If the price of oil is currently $75 you might buy options (a “call”) to buy oil for $85, $90 and $95 at future points in time so that at least you have a known ceiling on your costs, letting you set prices for your buyer with some idea of your profit, or at least a worse-case loss.

Those options aren't free but cost certainty is worth a lot in many cases. I think Southwest Airlines made a killing for the last few years with both options and long term contracts keeping their fuel costs below industry average.

It can get really complicated too. Suppose Southwest Airlines' long term contracts had been at $40 and oil had fallen to $30. Now their buy options at $85+ are worthless and their long-term contracts force a $10/barrel competitive disadvantage on them. To protect against this they might buy an option to sell oil at $35 (a “put”). Now if the price falls to $30 (or worse) they can at least sell their $40 fuel at $35 and not get killed, and if oil rises above $85 they don't pay more than that. It's fairly common to buy options simultaneously on both sides like that, spread over a range of prices. What options you can actually get depends on whether anyone is willing to take the other side of the bet of course...

I think those examples are reasonable but I might have some of it wrong. I don't do options: you can lose money in stocks but get killed in a few hours via options.
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