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It seems that every time you turn on a TV news program these days. There is talk about crude
oil prices but it's hard to explain how crude oil markets work and what factors impact pricing in 30 second sound bites. Lets take a closer look at how this works. The Basics: Crude oil is the world's most actively traded commodity. The largest markets for crude are in New York (on the NY Commodities Exchange or NYMEX) London and Singapore, 
but crude oil and refined products such as gasoline, diesel and heating oil are bought and sold all over the world. Crude oil comes in many varieties and qualities, depending on it's specific gravity and sulfur content. Futures Contracts: Typically, a futures contract is for crude to be delivered in the following month. The buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a preset price at a specified location. However, it is not uncommon for these transactions to be purely financial in nature, using different sets of complex trades, buyers and sellers don't necessarily need to physically exchange crude oil to turn a profit (or loss) The minimum purchase for such a contract is 1000 barrels. World Benchmark: Because there are so many varieties and grades of crude oil, buyers and sellers find it easier to refer to a limited number of references, or benchmark, crude oils. Other varieties are then priced at a discount or premium, according to their quality. Brent is considered the world benchmark and is used to price more than 60 percent of the world's internationally traded crude oil supplies. U.S. Benchmarks: WTI is the U.S. benchmark, meaning that crude oil sales into the U.S. are usually priced in relation to WTI. Prices quoted on the NYMEX generally refer to light, sweet crudes with a specific gravity and sulfur content within a certain range similar to WTI. OPEC Basket: The Organization of Petroleum Exporting Countries (OPEC) a cartel of some leading world producers has it's own reference. Known as the OPEC basket price, this is an average of 15 different crudes from Algeria, Angola, Ecuador, Indonesia, Iran,Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. OPEC aims to control the amount of oil it pumps into the marketplace to keep the basket price within a predetermined range. In practise, the price difference between Brent, WTI and OPEC basket are not large. So what is the "Therefore" A question many have asked is what drives changes in pricing. It may seem swings that saw prices up 50 percent to a record level of almost $150 a barrel in June followed by equally rapid declines defy logic. Not so, as the value of the dollar and global demand were generally agreed to have been the major factors in recent pricing trends. The sharp jump in prices since 2005 has coincided with the plunge in the value of the U.S. dollar against other leading currencies. A weak dollar encourages financial investors to look for more lucrative investment opportunities, with oil top of their list. Also, because oil is traded in dollars, a weak dollar means it takes more dollars to buy the same barrel of oil. Analysts say growth in global supplies is failing to keep pace with growth in demand. Global thirst for oil is intense. Demand has risen by about 3 million barrels a day since 2005 and is expected to rise by 32 million barrels a day in the next two decades. The U.S. remains the worlds largest oil consumer, so a rise or fall in economic activity in the states has a huge impact on crude prices. Increasingly industrial growth and higher standards of living in China and India also influence crude prices. Oil exporters say the recent price surge cannot be explained by just the laws of supply to demand. They point to the role of market speculators who bid up the price of crude based on the assumption of continued increases in demand.
It seems that every time you turn on a TV news program these days. There is talk about crude
oil prices but it's hard to explain how crude oil markets work and what factors impact pricing in 30 second sound bites. Lets take a closer look at how this works. The Basics: Crude oil is the world's most actively traded commodity. The largest markets for crude are in New York (on the NY Commodities Exchange or NYMEX) London and Singapore, 
but crude oil and refined products such as gasoline, diesel and heating oil are bought and sold all over the world. Crude oil comes in many varieties and qualities, depending on it's specific gravity and sulfur content. Futures Contracts: Typically, a futures contract is for crude to be delivered in the following month. The buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a preset price at a specified location. However, it is not uncommon for these transactions to be purely financial in nature, using different sets of complex trades, buyers and sellers don't necessarily need to physically exchange crude oil to turn a profit (or loss) The minimum purchase for such a contract is 1000 barrels. World Benchmark: Because there are so many varieties and grades of crude oil, buyers and sellers find it easier to refer to a limited number of references, or benchmark, crude oils. Other varieties are then priced at a discount or premium, according to their quality. Brent is considered the world benchmark and is used to price more than 60 percent of the world's internationally traded crude oil supplies. U.S. Benchmarks: WTI is the U.S. benchmark, meaning that crude oil sales into the U.S. are usually priced in relation to WTI. Prices quoted on the NYMEX generally refer to light, sweet crudes with a specific gravity and sulfur content within a certain range similar to WTI. OPEC Basket: The Organization of Petroleum Exporting Countries (OPEC) a cartel of some leading world producers has it's own reference. Known as the OPEC basket price, this is an average of 15 different crudes from Algeria, Angola, Ecuador, Indonesia, Iran,Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. OPEC aims to control the amount of oil it pumps into the marketplace to keep the basket price within a predetermined range. In practise, the price difference between Brent, WTI and OPEC basket are not large. So what is the "Therefore" A question many have asked is what drives changes in pricing. It may seem swings that saw prices up 50 percent to a record level of almost $150 a barrel in June followed by equally rapid declines defy logic. Not so, as the value of the dollar and global demand were generally agreed to have been the major factors in recent pricing trends. The sharp jump in prices since 2005 has coincided with the plunge in the value of the U.S. dollar against other leading currencies. A weak dollar encourages financial investors to look for more lucrative investment opportunities, with oil top of their list. Also, because oil is traded in dollars, a weak dollar means it takes more dollars to buy the same barrel of oil. Analysts say growth in global supplies is failing to keep pace with growth in demand. Global thirst for oil is intense. Demand has risen by about 3 million barrels a day since 2005 and is expected to rise by 32 million barrels a day in the next two decades. The U.S. remains the worlds largest oil consumer, so a rise or fall in economic activity in the states has a huge impact on crude prices. Increasingly industrial growth and higher standards of living in China and India also influence crude prices. Oil exporters say the recent price surge cannot be explained by just the laws of supply to demand. They point to the role of market speculators who bid up the price of crude based on the assumption of continued increases in demand.
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