OIL MARKETS EXPLAINED
From the BBC April 2, 2005
Big movements in the oil price have significant ramifications around the world. But just what makes the price move and how do the oil markets work? BBC News Online takes a closer look.
Crude oil, also known as petroleum, is the world's most actively traded commodity.
The largest markets are in London, New York and Singapore but crude oil and refined products - such as gasoline (petrol) and heating oil - are bought and sold all over the world.
Crude oil comes in many varieties and qualities, depending on its specific gravity and sulphur content which depend on where it has been pumped from.
If no other information is given, an oil price appearing in UK and other European media reports will probably refer to the price of a barrel of Brent blend crude oil from the North Sea sold at London's International Petroleum Exchange (IPE).
Futures contract
This would commonly be in a futures contract for delivery in the following month.
In this type of transaction, the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specified location.
Futures contracts are only traded on regulated exchanges and are settled (paid) daily, based on their current value in the marketplace.
The minimum purchase is 1,000 barrels.
World benchmark
Because there are so many different varieties and grades of crude oil, buyers and sellers have found it easier to refer to a limited number of reference, or benchmark, crude oils. Other varieties are then priced at a discount or premium, according to their quality.
Brent is generally accepted to be the world benchmark, although sales volumes of Brent itself are far below those of, for example, some Saudi Arabian crude oils.
According to the IPE, Brent is used to price two thirds of the world's internationally traded crude oil supplies.
In the Gulf, Dubai crude is used as a benchmark to price sales of other regional crudes into Asia.
This is not because there are more supplies of Dubai crude oil than of any other grade - there are not - but because it is one of the few Gulf crudes available in single, on the spot, sales as opposed to long term supply contracts.
However, if supplies became extremely limited and price swings became exaggerated, a new benchmark would have to be found.
US benchmark
In the United States, the benchmark is West Texas Intermediate (WTI).
This means that crude oil sales into the US are usually priced in relation to WTI.
However, crude prices on the New York Mercantile Exchange generally refer to 'light, sweet crude'.
This may be any of a number of US domestic or foreign crudes but all will have a specific gravity and sulphur content within a certain range.
'Sweet' crude is defined as having a sulphur content of less than 0.5%.
Oil containing more than 0.5% sulphur by weight is said to be 'sour'.
Slightly confusingly, the Organisation of Petroleum Exporting Countries (Opec) - a cartel of some of the world's leading producers - has its own reference.
Opec basket
Opec's basket price is an average of the prices for:
Saudi Arabia's Arab Light
The United Arab Emirates's Dubai
Nigeria's Bonny Light
Algeria's Saharan Blend
Indonesia's Minas
Venezuela's Tia Juana Light
and Mexico's Isthmus.
Known as the Opec basket price, this is an average of seven - always the same seven - crudes.
Six of these are produced by Opec members while the seventh, Isthmus, is from Mexico.
Opec aims to control the amount of oil it pumps into the marketplace so that its basket price remains within a range of $22-28 a barrel.
In practice, the price differences between Brent, WTI and the Opec basket are not large. Crude prices also correlate closely with each other.
Big movements in the oil price have significant ramifications around the world. But just what makes the price move and how do the oil markets work? BBC News Online takes a closer look.
Crude oil, also known as petroleum, is the world's most actively traded commodity.
The largest markets are in London, New York and Singapore but crude oil and refined products - such as gasoline (petrol) and heating oil - are bought and sold all over the world.
Crude oil comes in many varieties and qualities, depending on its specific gravity and sulphur content which depend on where it has been pumped from.
If no other information is given, an oil price appearing in UK and other European media reports will probably refer to the price of a barrel of Brent blend crude oil from the North Sea sold at London's International Petroleum Exchange (IPE).
Futures contract
This would commonly be in a futures contract for delivery in the following month.
In this type of transaction, the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specified location.
Futures contracts are only traded on regulated exchanges and are settled (paid) daily, based on their current value in the marketplace.
The minimum purchase is 1,000 barrels.
World benchmark
Because there are so many different varieties and grades of crude oil, buyers and sellers have found it easier to refer to a limited number of reference, or benchmark, crude oils. Other varieties are then priced at a discount or premium, according to their quality.
Brent is generally accepted to be the world benchmark, although sales volumes of Brent itself are far below those of, for example, some Saudi Arabian crude oils.
According to the IPE, Brent is used to price two thirds of the world's internationally traded crude oil supplies.
In the Gulf, Dubai crude is used as a benchmark to price sales of other regional crudes into Asia.
This is not because there are more supplies of Dubai crude oil than of any other grade - there are not - but because it is one of the few Gulf crudes available in single, on the spot, sales as opposed to long term supply contracts.
However, if supplies became extremely limited and price swings became exaggerated, a new benchmark would have to be found.
US benchmark
In the United States, the benchmark is West Texas Intermediate (WTI).
This means that crude oil sales into the US are usually priced in relation to WTI.
However, crude prices on the New York Mercantile Exchange generally refer to 'light, sweet crude'.
This may be any of a number of US domestic or foreign crudes but all will have a specific gravity and sulphur content within a certain range.
'Sweet' crude is defined as having a sulphur content of less than 0.5%.
Oil containing more than 0.5% sulphur by weight is said to be 'sour'.
Slightly confusingly, the Organisation of Petroleum Exporting Countries (Opec) - a cartel of some of the world's leading producers - has its own reference.
Opec basket
Opec's basket price is an average of the prices for:
Saudi Arabia's Arab Light
The United Arab Emirates's Dubai
Nigeria's Bonny Light
Algeria's Saharan Blend
Indonesia's Minas
Venezuela's Tia Juana Light
and Mexico's Isthmus.
Known as the Opec basket price, this is an average of seven - always the same seven - crudes.
Six of these are produced by Opec members while the seventh, Isthmus, is from Mexico.
Opec aims to control the amount of oil it pumps into the marketplace so that its basket price remains within a range of $22-28 a barrel.
In practice, the price differences between Brent, WTI and the Opec basket are not large. Crude prices also correlate closely with each other.
posted by Stephen McArthur at 8:09 AM
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