All about oil trading
Oil is not only one of the most important components of the global energy system and economy, but also one of the most popular exchange-traded instruments. Volatile The reaction of "black gold" quotations to world events makes oil trading not only profitable, but also very exciting.
Principles of oil trading
There are several ways to trade oil:
- With the help of futures contracts, which 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.
How is the value of a barrel of oil determined?
The oil produced in different fields around the world naturally has different chemical and physical properties. It would be logical to assume that for this reason oil from different fields will have different prices. It should be noted at once that the oil delivered to the world market is a mixture of oil from several fields located in a certain region. Such blends, or as they say, grades, are referred to as benchmarks or marker 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.
The price of a particular grade of crude oil is usually calculated at a discount to one or more benchmark grades. The exact formula for calculating the price is specified in the purchase or sale contract and takes into account the main properties of the oil grade in question (density and sulfur content), as well as transportation costs. For example, the price of Russian Urals and Siberian Light is calculated at a discount to the benchmark Brent grade.
The practice of linking the price of oil sold to the current market price was first introduced in 1986 by the Mexican company PEMEX. This practice has since become widespread around the world and is the main practice in determining the price of oil sales. Although some long-term contracts between oil producers and consumers still specify a specific oil price, the main pricing method is currently a contractual formula that links the selling price of oil to the current market price.
Why are oil prices billed in dollars?
It is a worldwide practice to express oil prices in U.S. dollars, and there are several reasons for this.
- The first reason is that, at present, oil has essentially become an independent currency if we consider it from a financial point of view. And all currencies, as you know, correlate with the U.S. dollar. By the way, this is why oil price changes reflect not only the change of balance between supply and demand, but also the strengthening or weakening of the US dollar.
- The second reason is that when trading oil in dollars, companies minimize their costs associated with the conversion of one currency into another. It is much easier and cheaper to once convert your currency into dollars or vice versa than to convert rubles into euros, yuan, etc. Companies prefer the dollar because it is the most liquid and convenient currency and has a low conversion fee.
- Nominating the price of oil in dollars also greatly facilitates price comparisons and arbitrage transactions.
Thus, oil trade denominated in U.S. dollars is nothing more than common sense and the demands of economic reality.
Currently, on the London InterContinental Exchange ICE daily volume of Brent oil is 70,000 futures contracts, which is equivalent to the daily volume of crude production. Trading volumes of WTI oil on the New York Mercantile Exchange NYMEX are 50,000 futures contracts a day. At the same time, physical delivery of oil under the contracts concluded on the exchange is only about 1% of the total trading volume. Such trading dynamics opens interesting and profitable prospects for the trader, who decided to trade oil.
Today, oil quotes are billed in U.S. dollars by tradition:))
Oil is not only traded on exchanges