Crude oil along with currency and gold is one of the leading indicators of almost every process in the global economy. The volatility of the oil price tends to depend on economic and political events. However, due to some oil specifics, there is always a certain time lag for oil exporters and consumers, which makes oil deals a very delicate investment.
Crude oil blends
Brent Crude is a benchmark brand of oil sourced from the North Sea. The brand name comes from the mine field in the North Sea discovered in 1970. Actually, oil of this brand is extracted from the following mines: Brent, Oseberg and Forties. All of them are located between the coasts of Norway and Scotland. Brent is one of the key oil brands traded on the world oil exchanges. The price of Brent oil has been the basis for price formation since 1971 for almost 40% of oil brands all over the world, particularly, for Russian Urals oil. That is why this brand is called benchmark. The price of a Brent oil barrel used to be 1 US dollar lower than the WTI oil price and 1 US dollar higher than so-called OPEC Reference Basket. However, this parity was changed in 2007, and Brent started to trade at a premium to WTI. Presently the debate has intensified over whether Brent should be further serve as a benchmark at price setting. This is primarily due to decrease in crude oil production in the North Sea which leads to falling liquidity and inaccuracies at setting the price of Brent and other oil brands.
Urals s a sour crude oil(sulfur content is about 1.3%) sourced in Khanty-Mansi Autonomous Area and Tatarstan. Major producers of Urals oil are the following companies: «Rusneft», «Lukoil», «Surgutneftegaz», «Gazpromneft», «TNK-VR» and «Tatneft». The main producers of the Urals oil are the following companies: Rusneft, Lukoil, Surgutneftegaz, Gazpromneft, TNK-VR and Tatneft. The price of Russian oil is determined by discounting Brent prices, since the Russian oil is believed to be of worse quality due to high sulfur content as well as heavy and cyclic carbohydrates. Recently, Russia has taken a series of measures to improve the quality of Urals oil by excluding the sour tartar oil (in the Republic of Tatarstan new distillation facilities are planned to be built in order to make gasoline from local oil instead of letting it run through the pipeline.) West Siberian oil is of acceptable quality. It is known as Siberian Light. In Russia the Urals oil futures are traded on the FORTS market on the RTS stock exchange.
WTI (West Texas Intermediate) is an oil brand produced in Texas, USA. Its density is 40° API, sulfur content is 0.4-0.5%. WTI is mostly used for gasoline manufacturing, and that is why this oil is in strong demand, especially in the USA and China.
Crude oil market participants
Generally, crude oil reaches the market thanks to oil-extracting enterprises ranging from small companies to giant corporations. It is quite logical that a company's influence on the market depends on the volume of oil it delivers. Consequently, other market participants pay more attention to large-scale oil producers.
This category brings together manufacturing companies of all sectors including oil refining and processing companies. The scheme is called a vertically-integrated structure. Such companies produce crude oil, refine it to a finished product (gasoline, fuel oil etc.), but distribute it in their own retail outlets.
Commodity and crude oil bourses
In some countries there are separate sectors of the largest bourses, which deal with raw materials, including crude oil.
Market investors have different interests, so they invest in various oil-related instruments. Normally, the most popular instruments among investors of oil market are futures.
The Organization of Petroleum Exporting Countries is an international intergovernmental organization established by petroleum-refining authorities with the purpose to stabilize oil prices. The members of this organization are countries with economies relying on oil exports. The OPEC as an organization was created at the conference in Bagdad on September 10-14, 1960. Initially, the following countries were members of the organization: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (the initiator of the establishment). Later on, these five countries, were joined by 9 other countries: Qatar (1961), Indonesia (1962-2008; left the OPEC on November 1, 2008), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973-1992, 2007), Gabon (1975-1994) and Angola (2007).
At present, the OPEC consists of 12 members, taking into account the changes in the structure in 2007 when Angola entered the organization and Ecuador rejoined it. In 2008, Russia announced its readiness to become an observer in the cartel.
Crude oil trading
Quality of oil produced in various parts of the world varies, and consequently, differs in price. Oil prices depend on density and fractions. The oil price standard is the Brent which is similar in composition to that sourced from the North Sea with delivery contracts traded at London Commodity exchange. This is the oil brand the price for which is usually reported by Mass Media.
As a rule, this price is a value of a contract for Brent oil supply next month. When signing a futures contract, the buyer is obliged to pay for and accept the delivered product, and the seller - to deliver it to the specified place.
Futures contracts are concluded on corresponding bourses daily and settled on the basis of the current market price of oil. The minimum contract volume is 1,000 barrels.
The main oil trading floors are the leading stock exchanges such as NYMEX, CME, RTS and LOE.
Last year oil was a key newsmaker along with the issue of the global financial crisis. Having reached the high of $147.26 per barrel on June 11, 2008, it lost 70% of its price in half of a year. Analytics assume that the main reason for the fall was overheating of the market caused by speculative capital. From the fundamental point of view, $100 per barrel was acceptable, but $140 was too much.
Eventually, in late 2008 oil stabilized within the range of $40-50 per barrel, and by spring of this year it fell to $38-42 per barrel. It was not bound to the dynamics of the American currency as in the first half of the year. It is hard to tell whether the oil market actually bottomed out. Six month ago it was overbought, but now it is clearly oversold. At that time the fair price was $101, and now, amid the global economic woes, a new fair price is $70-90 per barrel. However, hopes for oil quotations reaching such levels in 2009 seem to be groundless.
This fundamental factor was crucial in 2008 when oil rates tumbled. The financial crisis entailed serious problems in the real sector of economy. Fuel demand started to decrease. At the same time, in the first half of 2008 oil price rise was not propped up by strong oil demand.
In summer the world's largest agencies and investment companies predicted that the oil price would not to decline below $100 per barrel. Moreover, oil was forecasted to cost $150-200 per barrel by the end of the year. Such forecasts are not accidental, taking into account the fact that the biggest investment companies had their own positions on the oil market, and recommendations' rise benefited them.
Participation of major funds and investment companies in the oil market rally became one of the reasons for such a fast price fall. Nevertheless, at that time the financial crisis overwhelmed the world and nobody cared about fraud on the primary market. The liquidity crisis forced everyone to sell all the assets including primary contracts. Weak macroeconomic data and expectations of worse demand for fuel aggravated the situation all over the world.