April 23, 2018

Trader Education: Understanding Crude Oil Prices

Trader Education: Understanding Crude Oil Prices

Oil markets make up some of the most important financial trading assets in the world.  Petrol, diesel, oil used for industrial purposes and various other petrochemical products (even Vaseline) make up just some of the everyday uses for the commodity.  Massive volumes in oil commodities trading contracts are seen everyday, and this number has only grown now that online daytrading has risen in popularity. 

Crude oil is usually obtained through drilling. It is found along with various other impurities which are separated through fractional distillation.  Fractional distillation is a method of separation of various liquids which have different boiling points. It is formed due to the fossilization of organic material under anoxic conditions (with less dissolved oxygen in water).

Oil Refineries

Due to the world’s reliance on an efficient source of energy, the demand for crude oil is extremely high. Since a small number of countries (primarily the Middle Eastern countries) control a large portion of the world’s oil reserve, it has caused many political problems.

Oil refineries is an industrial plant that refines crude oil into petroleum products. They serve as the second stage of separation after the actual extraction by oil rigs. Once separated crude oil can be sold for various purposes. Major refineries can have produced up to a thousand barrels a day. Oil is usually obtained from oil fields. These are large tracts of land which are rich in oil.

Commodities Trading

The commodity commonly referred to as “oil” in the west is light, sweet crude oil. It is said to be sweet because of its 0.24% sulfur content. It is the underlying commodity in the New York Mercantile Exchange’s oil futures contracts. It is of high quality and can be easily refined. benchmark crude oil is crude oil that serves as a pricing point for other crude oil verities. It is the oil around which various other types of oil with different contents. West Texas, Brent Crude oil and Dubai crude and the commonly used benchmarks.

A crack spread is the term used by energy markets to describe the difference in prices between crude oil and petroleum products. It is a primary indicator for an oil company’s earnings. Companies can hedge against risks in the oil markets based on cracks. A trader should simultaneously purchase crude oil futures while selling petroleum product futures to establish an artificial position in the refinement of oil.

OPEC Influence on Oil Prices

Organization of Petroleum Exporting Countries (OPEC) consists of the most influential oil countries of the world organizing themselves to determine the supply of oil in the world market. They also gather to determine the price at which they supply oil to the market.

For the past 50 years, the price of crude oil has been denominated using US Dollars (USD).  The price of crude oil and the value of the U.S dollar are negatively correlated to each other. OPEC is considering switching this system to either a euro system or to quote the price using multiple currencies. Aging of oil fields can cause stress on the production of crude oil which has a high impact on its market price. Further, since crude oil is traded on the futures market, speculation can cause the price of oil to rise or fall.


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