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Crude Oil Fundamentals Explained

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Crude oil fundamentals explained in detail for traders and students.

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Crude Oil Fundamentals Explained

  1. 1. CRUDE OIL FUNDAMENTALS Rishabh Surana
  2. 2. Introduction Crude oil is a naturally-occurring substance found in certain rock formations in the earth. It is a dark, sticky liquid classified as a hydrocarbon. This means, it is a compound containing mainly carbon and hydrogen. Crude oil is highly flammable and can be burned to create energy. Crude oil is the most important source of energy commodity at a international range and since all kinds of transportation depend intensely on oil, the long run option oil is of critical interest.  Crude oil is the world’s most actively traded commodity. Light, sweet crudes are preferred by refiners because of their low sulfur content and relatively high yields of high- value products such as gasoline, diesel fuel, heating oil, and jet fuel.
  3. 3. History of Oil The first commercial oil well drilled in Romania in 1857. The Indian petroleum industry is also one of the oldest in the world, with Oil being struck at Makum near Margherita in Assam in 1867. In 1889 in Digboi in Assam first oil was struck by Burma oil company. Since the shift from coal to oil, the world has consumed over 875 billion barrels. Another 1,000 billion barrels of proved and probable reserves remains to be recovered.
  4. 4. Crude Oil Trading Crude oil traded in most of the commodity trading exchanges in all over the world . You can trade Crude Oil futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). The MCX commodity investors and traders also having the facility to trade with crude oil futures . MCX crude oil future lot size is 100 barrel and margin is 5% of the lot valuation ( depending on the broker and market volatility).
  5. 5. Components of Oil The exact molecular composition varies widely from formation to formation but the proportion of chemical elements vary over fairly narrow limits as follows: Carbon -- 83-87% Hydrogen --10-14% Nitrogen--0.1-2% Oxygen--0.1-1.5% Sulfur--0.5-6% Metals-- <1000ppm
  6. 6. Classification The petroleum industry generally classifies crude oil by:- 1. The geographic location it is produced in. 2. Its API gravity. 3. By its sulfur content.
  7. 7. Fundamental factors affecting crude oil prices Weather conditions Government policy Political Conditions World oil demand World oil supply Futures Market GDP
  8. 8. Continued… Higher prices were supported by a number of factors. One was the ongoing U.S. war on terrorism and rising tensions with Iraq. There was the likely potential that military action would be taken against Iraq that would disrupt the supply of crude oil to the market. While there were factors supporting higher prices, there were also factors working against them. The Organization of Petroleum Exporting Countries (OPEC) after Futures Markets a meeting in 2001 agreed that production of oil would be cut. The question was whether the non-OPEC countries would act to support OPEC and cut production of whether they would go ahead and try to gain market share at the expense of OPEC.
  9. 9. Continued… Futures and options on light sweet crude oil are traded on the New York Mercantile Exchange (NYMEX) along with other energy products like heating oil, unleaded gas, and natural gas. London’s International Petroleum Exchange (IPE) trades Brent crude oil futures and options. The IPE also trades gasoil, natural gas and fuel oil. The Singapore International Monetary Exchange (SIMEX) trades Brent crude oil futures.
  10. 10. Crude Oil Units (average gravity) 1 US barrel = 42 US gallons. 1 US barrel = 158.98 litres. 1 tonne = 7.33 barrels . 1 short ton = 6.65 barrels . Note: barrels per tonne vary from origin to origin.

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