What is oil trading

What is oil?

Oil is a highly valued commodity that is crucial for many industries worldwide. As a non-renewable energy resource, oil comes in different forms, such as crude oil, which is extracted from the ground, and refined oil products like gasoline, diesel, and jet fuel. The price of oil is influenced by factors such as supply and demand, geopolitical events, and economic conditions.
What is crude oil?
The main type of oil traded in markets is crude oil, a naturally occurring, unrefined petroleum product that is extracted from the earth. The makeup of crude oil can vary significantly depending on its source, which means there are different types or “grades” of crude oil. Here are some of the major types of crude oil:

• Brent Crude: Brent crude oil is one of the most widely traded and benchmarked types of crude oil. It is primarily composed of a blend of oil from multiple oil fields in the region and is extracted from oil fields in the North Sea, which makes it convenient to transport via tanker. Brent crude is known for its relatively low sulphur content and high American Petroleum Institute (API) gravity, a measure of how heavy or light a petroleum liquid is compared to water. This makes it a "light" and "sweet" crude oil. It is commonly used as a reference price for global oil trading.
• West Texas Intermediate (WTI): WTI is another popular benchmark for crude oil. It is extracted from the United States, primarily from oil fields in Texas and surrounding areas. As these oil fields are landlocked, transporting WTI oil is relatively expensive compared to Brent. WTI crude oil is considered a light and sweet crude, like Brent. It is known for its high API gravity and low sulphur content. WTI is traded on the New York Mercantile Exchange (NYMEX) and serves as a pricing reference for crude oil in North America.
• Dubai Crude: Dubai crude is a medium-grade crude oil primarily produced in the Middle East. It is a benchmark for oil pricing in the Asian market. Dubai crude has a higher sulphur content and a lower API gravity compared to Brent and WTI. It is often used as a reference for pricing Middle Eastern and Asian crude oil grades.

• Louisiana Light Sweet (LLS): LLS is a type of crude oil produced in the Gulf of Mexico region of the United States. It is a light and sweet crude, like Brent and WTI. LLS is commonly used as a benchmark for pricing U.S. Gulf Coast-produced crude oil.

• OPEC Basket: The Organization of the Petroleum Exporting Countries (OPEC) calculates an average price for a basket of crude oils produced by its member countries. This basket includes various crude oil grades from countries like Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. The OPEC basket serves as a reference for pricing OPEC-produced crude oil

• Canadian Crude: Canada is a significant producer of crude oil, and different types of crude are extracted from its oil sands and conventional oil reserves. The types of Canadian crude include Western Canadian Select (WCS), Syncrude, and Cold Lake Blend. Canadian crude oils are generally heavy and contain higher levels of sulphur compared to light, sweet crude oils like Brent and WTI.

What is the oil market?

The oil market refers to the global network of buyers and sellers involved in the production, refining, distribution, and consumption of oil. It is a complex and highly influential market that significantly impacts the global economy. Major oil-producing countries, oil companies, traders, and consumers are all active participants in this market. The oil market is known for its volatility due to factors like political tensions, natural disasters, decisions made by governing bodies (such as OPEC), and changes in global demand.
What affects oil prices?There are many factors that influence the price of oil. As a rule, it’s important for anyone trading oil to stay up to date with economic news and market trends to ensure a greater understanding of how prices are affected. Here are some of the main factors affecting oil prices:

• State of the economy: When an economy is performing badly, there is less need for oil, so the price drops. As an economy improves, oil demand recovers, and prices increase.
• Strength of the US dollar: Oil is pegged to and exchanged in US dollars, meaning the value of the USD has a major impact on oil prices; a strengthening dollar can lower prices, and a weak dollar sees them rise.
• Market speculation: Oil prices are set on the futures market, meaning speculation about future events can impact prices. Traders should therefore be aware of news that might affect prices.
• New energy sources: Growth in renewable energy production (i.e., solar and wind) may cause a decline in the dependence on oil, thereby causing prices to fall.
• Global oil production: The Organization of the Petroleum Exporting Countries (OPEC), plus major oil producers like the USA, Canada, and China, are major influences on the oil price and supply. As such, oil prices fall when output increases and rise when output is restricted.
• Exogenous shock: Events like natural disasters, war, and geopolitical instability can severely impact oil prices. When output or supply is reduced due to an unforeseen 'shock' event, panic buying often leads to higher prices.

In the next article I will talk about oil trading. Have a good weekend everyone.