“Oil is going up” is not yet a complete trade. Which oil, delivered where, and at what time? A commodity perp may track a spot assessment, a particular futures contract or a changing combination of contracts. Those choices can matter as much as the broad view.
Begin with the exact reference. A familiar ticker does not tell you the commodity’s grade, location, maturity or the number of physical units represented by each contract.
Physical constraints enter the price
Commodities are produced, transported, stored and consumed. A shortage of storage in one location can affect a nearby delivery contract differently from a contract delivered months later. Weather can change electricity or gas demand quickly; a mine or pipeline cannot always increase supply just as quickly.
This gives a useful way to read a headline. Identify the physical constraint it changes, the time needed for others to respond and the contract most exposed to that interval. A disruption resolved next week need not justify the same price change in next year’s supply.
Inventory data also need a cause. A crude-oil stock draw could reflect stronger refinery demand, lower imports, lower production or higher exports. The EIA’s Weekly Petroleum Status Report publishes these components separately. Reading the balance behind the stock change is more informative than treating every draw as the same demand signal.
The curve contains the cost of time
A futures curve lists prices for different delivery dates. When later delivery is more expensive than nearer delivery, the curve is in contango; the reverse is backwardation.
Storage, financing, insurance and the value of having the physical commodity available now can all help explain that shape. CME’s discussion of contango and backwardation describes these carrying costs and convenience benefits. A higher distant price is therefore not simply a forecast that the spot price must rise to it.
Suppose nearby oil trades at $70 and a later contract at $72. A trader who holds the $72 contract can lose money if it approaches expiry at $70, even while the cash price has stayed at $70 throughout. The entry contract had different economics from the spot asset.
Rolling from one futures maturity into another is not, by itself, an immediate cash loss equal to their quoted price difference. Futures are entered through margin rather than purchased for their entire notional value. The economic result depends on subsequent price changes, the quantities held and the roll convention. This matters when interpreting a continuous chart or a product that changes its reference over time.
The perp’s reference
Read whether the perp follows a fixed contract, rolls between maturities or uses another assessment. If it rolls, learn the timing and weights. If its reference market closes, learn what happens to its oracle, mark and permitted trading during that interval.
Funding and the basis—the gap between the perp and its stated reference—are separate from the physical commodity view. A correct view about oil supply can produce a disappointing trade if the particular perp starts at an expensive premium or incurs financing costs while the thesis takes time.
Contract units and P&L
For an illustrative linear contract representing one barrel per unit, 100 units entered at $70 create $7,000 of exposure. A rise to $72 produces $200 before costs. A fall to $65 produces a $500 loss.
PnL = units × contract multiplier × price change.
Check the multiplier rather than inferring it from the ticker. Gold, gas, oil and agricultural products use different quoting conventions, and a perp need not use the conventional futures contract size.
A near-term shortage may move the front of the curve much more than later delivery prices. If the perp follows a later contract, the broad commodity view can be right while the chosen market barely responds. The reference and the timing are therefore part of the forecast, not details to check after choosing the trade.