January 1st: A US company expects to sell 20,000 barrels of crude oil at the end of June. The company takes a short position in 20 oil futures contracts with delivery in August on January 1st and plans to close out its position in June after it completes its sale. Each futures contract is for the delivery of 1,000 barrels of oil. The futures price on January 1st is
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. Say in June, the spot price of each barrel of oil is $65 and the futures price for delivery in August is $66. What net price does the company sell each barrel for? Please write down a per barrel price the company receives taking into account both the price at which it sells the barrel and the profits/losses on its futures position.

Question

January 1st: A US company expects to sell 20,000 barrels of crude oil at the end of June. The company takes a short position in 20 oil futures contracts with delivery in August on January 1st  and plans to close out its position in June after it completes its sale. Each futures contract is for the delivery of 1,000 barrels of oil. The futures price on January 1st is 
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. Say in June, the spot price of each barrel of oil is $65 and the futures price for delivery in August is $66. What net price does the company sell each barrel for? Please write down a per barrel price the company receives taking into account both the price at which it sells the barrel and the profits/losses on its futures position.

BlackTom AI · Accepted Answer

We start by identifying the key actions and prices involved. The firm is short 20 futures contracts, with each contract representing 1,000 barrels, so the total futures position covers 20,000 barrels. They plan to sell 20,000 barrels in June at the spot price that exists then. The initial futures price on January 1st was 60 per barrel, and when closing out in June, the August futures price is 66 per barrel.

Now, for a short futures position, you profit if the price falls after you enter, and you incur a loss if the price rises. The per-barrel futures P/L from entering at 60 and settling at 66 is: P/L = initial price − closing price = 60 − 66 = −6 dollars per barrel. Since the position is for 20,000 barrels, the total futures P/L is −6 × 20,000 = −120,000 dollars.

Separately, the company sells the physical barrels at the June spot price of 65 dollars per barrel. So the realized price from the sale itself is 65 dollars per barrel.

To obtain the net price per barrel considering both components, combine the spot sale price with the per-barrel futures P/L: Net price per barrel = spot price at sale + futures P/L per barrel = 65 + (−6) = 59 dollars per barrel.

Interpreting the numbers in a compact way: the firm’s hedging reduces the effective sale price from 65 to 59 per barrel because the short futures position loses 6 dollars for each of the 20,000 barrels hedged, and that loss offsets part of the higher spot sale price.

If you track the cash flows step by step: you receive 65 dollars per barrel from selling the oil physically, and you incur a 6-dollar loss per barrel from the futures offset, totaling a net of 59 dollars per barrel. The analysis assumes the June sale occurs and the futures position is closed at 66 dollars per barrel for August delivery.

In summary, the combined effect of the June spot sale and the futures hedge yields a net 59 dollars per barrel for the company, reflecting the hedging outcome against the rise in futures prices from 60 to 66 and the spot price of 65 at sale.

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