Oil
What is oil?
Oil - one of the Earth's most important minerals, which is a flammable oily liquid of predominantly black color.
Is it possible to invest in oil?
From a financial point of view, oil and petroleum products (gasoline, diesel, etc.) are an attractive way to invest money. Oil pricesLike any other commodity, prices are determined by supply and demand levels. If the volume of supply decreases, prices rise until demand equals supply. The peculiarity of oil is inelastic demand, i.e. demand does not fall as the price rises. In this regard, a decrease in the volume of supply leads to a sharp increase in oil prices.
Thus, oil and its derivatives are not only raw materials and commodities in international markets, but also a popular financial asset among exchange traders.
How to trade oil?
There are several ways to trade oil:
- With futures contractswhich are concluded on the commodity exchange;
- With the help of contracts that are concluded in the over-the-counter market;
- With the help of long-term contracts between oil producers and consumers.
The largest volumes of oil are traded on two exchanges:
- New York Mercantile Exchange NYMEX;
- London InterContinental Exchange ICE.
Oil is also traded in smaller volumes on the stock exchanges of Tokyo, Shanghai and Dubai.
The OTC oil market, unlike the exchange market, does not have any definite binding to the place. It can be characterized as a global brokerage network, within which oil sales and purchases are made.
There is a standard volume of traded oil on the exchange market, which is usually 1000 barrels per contract. On the OTC market there is no such standard, trade transactions are possible with any volume: one rail tanker, two tankers, etc., with delivery to a selected point in the world.
Exchange-traded oil prices are widely available on relevant websites and are often mentioned in news reports. Prices formed in the OTC market are not so widespread, they can be found in the bulletins of oil price agencies, such as Platts or Argus Media.
From a technical point of view, trading oil is no different from trading currency pairs or other assets on the OTC markets.
What are the most popular oil grades?
In Europe and Asia, the reference grade is a blend of crude oil from 15 fields located in the North Sea, which is called Brent. In the U.S., the marker variety is considered to be WTI (West Texas Intermediate) oilwhich has an alternate name of Light Sweet. In the Middle East, the benchmark is a blend of Dubai and Oman crudes called Middle East Crude. Russian Oil Urals is a mixture of oil from fields in the Volga-Urals region and fields in Western Siberia. There are about 200 main oil grades in total.
Because of the large number of grades of oil for exchange trading were determined highly liquid oil grades: Brent, WTI and Middle East. Since the competition at the exchange trades is almost perfect, the oil prices formed at the exchanges are considered to be the most objective ones.
What affects the price of oil?
Like the value of any commodity, the price of oil depends on supply and demand.
It should be borne in mind that in practice, these two seemingly simple components of quotations are influenced by many factors. In fact, everything that can somehow (directly or indirectly) affect the production or consumption, the purchase of energy can affect the situation on the commodity markets. Especially if investors, trading oil contracts, will believe in the effectiveness of this or that factor: there is always a speculative element in the price level.
So what are the main factors affecting supply and demand?
- The position of the oil-exporting countries. OPEC (an association of countries that are the main suppliers of black gold to the world market) can set one or another quota for production. Obviously, OPEC's willful decision to lower the quota greatly reduces supply and pushes the price up.
- Political instability in oil-rich regions - as a factor complicating the supply and transportation of energy.
- Similarly - supply can reduce a variety of (non-political) conditions that impede free trade - for example, natural disasters, bad weather, pipeline accidents, and so on.
- Political decisions to increase or decrease U.S. oil inventories. Small inventory levels may push up demand - buyer anxiety ("reserves are low!") is at work.
- Overall growth/degradation of the world economy: because the bigger the world economy, the more energy it needs.
- Scientific developments, the adoption of certain bills: for example, the increase in the share of electric cars in Europe has led to some weakening of the position of oil.
In addition to these rather obvious factors, the following should also be noted:
- First, rate fluctuations can be caused simply by the "big game" of wealthy investors. The speculative element in commodities markets is no less than in purely financial markets.
- Secondly, it is also necessary to take into account the U.S. currency rate. After all, goods (including black gold) are valued precisely in relation to the dollar - the pair looks like that: USD/barrel. And so a weakening of the dollar means a rise in oil prices and vice versa.
What does the price of oil affect?
Sharp fluctuations in world oil prices directly affect countries whose main source of income is the sale of oil and petroleum products. A collapse in the price of black gold means a drop in the national currency, an increase in consumer prices, and threatens a state budget deficit, the revenues of which depend on the oil and gas sector.