History of Oil Trading

The history of oil trading can be traced back to commodity trading where goods such as gold, oil, coffee, and orange juice are dynamically traded. In a commodity market, the good must be standardized, raw, and unprocessed. They should also have an adequate shelf life for delivery. Finally, there must be price fluctuation and uncertainty for the goods. These three characteristics make the trading of commodities such as oil possible and profitable.

Commodity trading is something that is not a recent economic phenomenon, although the old forms of it are very much different from what it looks today. Civilizations as old as ancient Sumeria have engaged in commodity trading in order to have a system of delivery of goods and make commerce more efficient and well-organized. Sumerian farmers used a medium very similar to money in the form of clay tokens shaped as livestock when they are trading goats and sheep. They would use these when they would pledge a particular number of livestock to a dealer. They served as the earliest form of futures contract that were guaranteed by local banks back then. Eventually this system grew into a global market for trading gold and silver for other goods.

Meanwhile the beginning of modern commodity trading can be traced to Chicago, where the Chicago Board of Trade was established in 1848. It served as a central place for farmers and dealers to convene and settle prices. With this system, prices and negotiations became more transparent resulting in a standardization of weights and grades based on aggregate supply and demand.

Because of the success of the standardized central market, more farmers and dealers became engaged with futures trading wherein they commit to future exchange of goods in exchange for cash. These trade contracts were securitized by banks and used them as collateral for loans. Eventually these contracts changed hands if the farmer and dealer encountered certain circumstances that would make the deal unfavorable to them. These farmers and dealers noticed the trend that the value of contract changed whenever there is an event in the market, such as bad weather. This became the blueprint of the modern commodity trading that we encounter nowadays. Finally, people who have no intention of selling or acquiring goods began joining the market and became speculators in the now-liquid futures market.