This was orignally published in 1987 by Oxford Institute for Energy Studies.
The establishment, of a very successful crude oil futures market by the New York Mercantile Exchange (NYMEX) has introduced a new and important factor into the process of oil price formation. Trading in crude oil futures has been expanding very rapidly and now provides an instrument that enables economic agents to hedge against short-term price risks. The NYMEX is also a reading mechanism or oil price discovery in the short term.
However, as is the case for most futures markets, NYMEA contracts extend over a fairly short time horizon (eighteen months in theory but only four months in practice), and there is a lack of fiexibility prevailing once a hedge has been initiated ( a price is rigidly fixed from then on no matter what the market does afterwards).