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Different Types of Crude Oil and their Relevance

23 Feb 2022 0 COMMENT

Crude oil, which is also known as black gold, is one of the most valuable commodities in the world as it is a primary source of energy for many crucial industries that keeps the world running. Due to the importance of this commodity, there exists a vast market for crude oil and any price change can impact the economic outlook at every level. In this article, we will discuss the different types of crude oils and their relevance.

Let’s start by going through the different types of crude oils in the market

Firstly, there is the West Texas Intermediate or WTI, which is also known as US crude. It is considered to be a premium-quality crude oil and is highly valued all around the world. It is a general belief that a higher quantity and quality of gasoline could be refined out of one barrel of WTI as compared to any other type of crude oil traded in the market.

WTI contains around 0.24% of sulphur and is a light and sweet crude oil produced and refined in the United States of America and is usually priced higher than Brent crude oil and OPEC basket oils that we will discuss shortly.

Secondly, there is Brent Crude oil, which is a combination of oils extracted from fields in Brent and North Sea and mostly refined in Northwest Europe. Brent crude consists of oils like Brent blend, Forties blend, Oserberg and Ekofisk crudes which are together known as BFOE.

It is a rather light and sweet crude oil containing around 0.37% of sulphur. Brent crude is also a good source for producing gasoline and middle distillates.

And thirdly, there is the OPEC basket, which is a combination of seven different types of crude oils and these are Saudi Arabia’s Arab light, Nigeria’s Bonny Light, Algeria’s Saharan blend, Dubai’s Fateh, Venezuela’s Tia Juana light and Mexico’s Isthmus. OPEC oil is less sweet and much darker than WTI and Brent, which makes it a bit cheaper than the latter two. OPEC claims to try and ensure the price stability of oil by increasing or decreasing oil production by its member countries.

Let’s now discuss the factors that impact the price of crude oil

Firstly, there are the forces of supply and demand that impact the price of crude oil. Generally speaking, a reduction in the supply of oil would translate to an increase in oil prices and vice versa.

Let’s understand how demand impacts oil price through an example. If countries like India or China, which are large importers of oil start witnessing an economic slowdown, chances are that their demand for oil would reduce resultantly. Since these countries are one of the biggest consumers of oil, such a reduction in demand holds the potential to significantly reduce oil prices throughout the world.

Similarly, discoveries of new oil reserves may lead to an increase in the oil supply and resultantly reduce oil prices throughout the world.

Let’s now discuss how OPEC impacts oil prices? OPEC, that stands for the Organization of Petroleum Exporting Countries, is a consortium of 13 countries as of 2021, and it is one of the primary influencers of oil prices as it controls a major share of the world’s supply of oil reserves. OPEC aims to control oil production levels in order to meet global demand and can influence prices all around the globe by either increasing or decreasing the production levels of oil by its member countries.

Then, if we were to consider the global perspective, political instability and conflicts, especially in the Middle East, can cause fluctuations in the price of oil due to this region controlling a major share of the global supply of oil. If such incidents start impacting the supply of oil and consequently reducing it, then chances are that oil prices may increase throughout the world.

Additional Read: How to trade in commodity?

Let’s now talk about the type of crude trade in India

In India, oil futures are traded at Multi Commodity Exchange (MCX). Oil futures could be traded either for risk management or speculation.

An oil futures contract is an agreement that gives one, the right to purchase oil at a predefined price and on a predefined date in the future, wherein both the buyer and seller of the contract are obligated to fulfil their side of the transaction. However, these contracts can be settled in cash.

An example of risk management or hedging could be airlines or oil companies buying a futures contract to safeguard themselves against potential rising prices. A hedger would be willing to take physical delivery of oil barrels but it would depend on settlement process of Crude Oil Futures contract at an exchange. Settlement could be in the form of delivery or cash.

An example of a speculator could be a trader who wish to make profit on price movement of crude oil without any interest in spot market or physical delivery.

In nutshell, crude oil market is volatile and it could be difficult to foresee price movements due to a lot of factors impacting these movements.

Additional Read: Tax on Commodity Derivatives

To conclude, let’s summarize that we have discussed so far:

  • We talked about different types of crude oils like; WTI, Brent crude and OPEC basket.
  • Then we talked about the factors that impact the prices of crude oil globally.
  • Then we talked about how oil futures are traded in India, that could either be used for risk management or as a hedging tool or even for speculatory purposes.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. The contents herein mentioned are solely for informational and educational purpose.