Oil is one of the most important and most frequently traded commodities in the world. The price of oil commodities have repercussions for everyone, as oil is used in so many ways and in so many different products.
One such use is petroleum. A large percentage of modern vehicles use petroleum as fuel, and therefore a large proportion of the world’s transport industry depends on it. The world’s transport infrastructure is vital for nearly every trade in the world to function, and as a result crude oil prices affect the costs of running all of this transport. Companies have to accommodate any price fluctuations, and we all feel the effects as a result.
There are four types of crude oil commodity. Light crude oil has a low density, and is therefore easier to transport and refine. Chemically, it is ‘closer’ to finished products, such as petroleum and diesel, and as a result requires less refining and processing. This makes it more valuable and therefore more expensive to purchase. Heavy crude oil, by contrast, has a higher density, and is harder to transport and refine. This makes it cheaper to purchase. However, the cost of drilling it can be twice as much. Sweet crude oil has a low sulphur content, and has fewer impurities. This makes it cheaper to refine; sour crude oil, on the other hand, has a high sulphur content, which means it contains more impurities and is costlier to refine. Companies have to get the balance right and choose the oil that will be cheapest to drill, refine and convert in the most economic way.
Commodity trading in crude oil is based on US Dollars and Cents per barrel. A futures contract for light, sweet crude oil on the NYME exchange trades at 10,000 barrels, or 42,000 gallons.
Crude oil prices are therefore based on which blend is used. There are 161 different types of blend around the world, and of these, there are four primary blends that are used as benchmarks: Brent Crude oil, Western Texas Intermediate (WTI), Dubai Crude and the Organization of the Petroleum Exporting Countries (OPEC) Basket. Brent Crude, which is drilled in the North Sea, the area between the UK, Mainland Europe and Scandinavia, is a light, sweet crude. WTI is the benchmark for oil prices in the US; however production has been falling in recent years. Dubai crude is a light, sour crude, and is the benchmark for oil prices in the Persian Gulf. Lastly, the OPEC Basket’s crude oil is the benchmark for oil in OPEC countries, which consists of 13 of the world’s major oil producing countries.
The last of these crude oil price benchmarks is based on the OPEC Basket. The 13 OPEC countries consist of Iraq, Iran, Kuwait, Indonesia, Libya, Algeria, Nigeria, Qatar, Saudi Arabia, Angola, the United Arab Emirates, and Venezuela. The organization was founded in 1960, and was formed in order to collectively obtain a better position when negotiating with the major multi-national oil companies. It was originally had 5 members, however membership has grown and any country that produces a considerable amount of oil can join; the discovery of a large oil field in Brazil recently may encourage it to join.
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