Unlike Spot Foreign Exchange, the oil contracts are based on the ICE futures price (Front-Spot Month). This futures price is the largest price benchmark for the oil industry worldwide.
Futures contracts EXPIRE because they are related to a definitive date and there are many months traded.(The forward prices can be higher or lower depending on market conditions).
In order to remove final day volatility at AxiTrader we switch from using the front month and into the second month one trading day prior to the exchange expiry.
An example of this is when the Brent for September expires, the October price needs to be used and the price will increase by $1.38. This is obviously not a price rise in oil but just a move to a new reference price and therefore no profit or loss will be incurred as a result.
In order to make sure this does not cost, a cash adjustment needs to be made and please find two examples below:
Example 1 Long position of 1000 barrels @ $113.47Cash adjustment of - $1,380 is made on accountProfit of $1,380 is made on open positionNet financial effect is zero.
Example 2 Short position of 2000 barrels @ $113.47Cash adjustment of +$2,760 is made on accountLoss of $2,760 is incurred on open positionNet financial effect is zero.
