The two types of spot markets
Concretely, the exchanges take place directly between seller and buyer who negotiate the differential between the price of the finished product and the price of crude oil. There are two types of spot markets, those for crude oil and those for refined products. There are three spot markets for crude oil. Each of these three markets relating an influential zone. Mainly the London market where the barrel of Brent is listed, which is still today one of the best price benchmarks for crude oil. Next comes the New York spot market which quotes a barrel of WTI, then the Singapore market which relates to the spot market for the entire Dubai area. (Barrel Dubai Light)
The main players in these crude oil spot markets are of course the oil companies which act directly on the markets through their trading services or their subsidiaries.
As for the spot markets for refined products, they are generally found around the refining areas. This explains why there are so many.
Advantages and disadvantages of spot markets
As we mentioned above, spot markets are short term markets. When you trade in oil, you talk less and less about long-term trading. The advantage of such a system is the availability of this oil anywhere in the world, regardless of its country of origin. This system also prevents small companies from changing the prices of crude oil in order to generate personal profits. On the other hand, the spot markets are more and more reactive to the phenomena of announcements, just like the other financial markets. Their volatility is therefore more and more important due to the fears generated by certain news events which are sometimes unfounded. These effects are in fact caused by a fear of oil shortages which regularly drive up prices.
Trading on spot markets
Unless you are a big industrialist or an institutional investor, you cannot intervene directly in the spot oil market. With market knowledge, you too can invest in the spot oil market.
To do this, you simply have to go through an intermediary also called a broker, who provides you with trading tools in the form of an online platform. Usually, CFD brokers allow you to trade oil online through tools called CFDs. These CFDs (contracts on the difference), in fact, don't offer to buy barrels of oil, but to speculate on the price of oil listed on one or more of the spot markets. Some brokers will offer you to trade WTI oil and others Brent oil.
Be careful, depending on the type of oil you are trading with CFDs, the indicators to follow are of course not the same. When you see a rise or drop in stocks of US oil, for example, it has very little influence on Brent but has a very strong influence on WTI.
What is the difference between the spot market and the futures market?
There are, of course, important differences between the spot market and the futures markets for oil and gas.
In the spot market, transactions take place on a real stock exchange where quantities of physical oil are exchanged in order to meet a real and immediate demand. Traders try to make money by selling their oil to the highest bidder or by buying oil stocks at a low price in order to sell them at a higher price.
In this market, a stock of crude oil may pass through several different owners, especially during its transport by ship. Indeed, during its journey, oil can be bought by a foreign refiner and eventually delivered to another country if an industry or refinery needs it urgently. Traders in the spot market thus work for independent financial firms and on behalf of oil companies.
Thus, if professional traders buy and sell crude oil in the spot market on behalf of these industries, the price of the purchased product may change between production and processing, which will affect the price of the product and the price of the finished products. In this case, if the price of oil has risen, the company will make a profit by reselling its finished products at a higher price. If the price of oil has fallen, the value of the refined products will also fall. The trader will therefore suffer financial losses.
This is why traders sometimes buy and sell oil on the futures market rather than on the spot market. In the futures market, the buyer and seller will sign a contract to exchange a given quantity of oil at a future date at a price that is defined in advance.
Thanks to this futures contract, the trader can protect his company from a drop in oil prices on the spot market. This way, he knows precisely, even before the oil is refined and transformed into a finished product, how much the sale will bring in and what his profits will be, since price variations cannot affect them in any way.