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A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.
The Organization of the Petroleum Exporting Countries is an intergovernmental organization of 13 countries. Founded on 14 September 1960 in Baghdad by the first five members, it has since 1965 been headquartered in Vienna, Austria, although Austria is not an OPEC member state. As of September 2018, the 13 member countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world's "proven" oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the so-called "Seven Sisters" grouping of multinational oil companies. A larger group called OPEC+ was formed in late 2016 to have more control on the global crude oil market. The demand for OPEC oil fell to a 30-year low in the second quarter of 2020.
Saudi Aramco, officially the Saudi Arabian Oil Company, is a Saudi Arabian public petroleum and natural gas company based in Dhahran.
West Texas Intermediate (WTI) can refer to a grade or a mix of crude oil, and/or the spot price, the futures price, or the assessed price for that oil; colloquially WTI usually refers to the price of the New York Mercantile Exchange (NYMEX) WTI Crude Oil futures contract or the contract itself. The WTI oil grade is also known as Texas light sweet, although oil produced from any location can be considered WTI if the oil meets required qualifications. Spot and futures prices of WTI are used as a benchmark in oil pricing. This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.
The International Exchange, now ICE Futures, based in London, was one of the world's largest energy futures and options exchanges. Its flagship commodity, Brent Crude was a world benchmark for oil prices, but the exchange also handled futures contracts and options on fuel oil, natural gas, electricity, coal contracts and, as of 22 April 2005, carbon emission allowances with the European Climate Exchange (ECX).
Brent Crude may refer to any or all of the components of the Brent Complex, a physically and financially traded oil market based around the North Sea of Northwest Europe; colloquially, Brent Crude usually refers to the price of the ICE Brent Crude Oil futures contract or the contract itself. The original Brent Crude referred to a trading classification of sweet light crude oil first extracted from the Brent oil field in the North Sea in 1976. As production from the Brent oilfield declined over time, crude oil blends from other oil fields have been added to the trade classification. The current Brent blend consists of crude oil produced from the Brent, Forties, Oseberg, Ekofisk, and Troll oil fields.
Sour crude oil is crude oil containing a high amount of the impurity sulfur. It is common to find crude oil containing some impurities. When the total sulfur level in the oil is more than 0.5%(by weight) the oil is called "sour".
The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus and Western Canadian Select (WCS). There is a differential in the price of a barrel of oil based on its grade—determined by factors such as its specific gravity or API gravity and its sulfur content—and its location—for example, its proximity to tidewater and refineries. Heavier, sour crude oils lacking in tidewater access—such as Western Canadian Select—are less expensive than lighter, sweeter oil—such as WTI.
A benchmark crude or marker crude is a crude oil that serves as a reference price for buyers and sellers of crude oil. There are three primary benchmarks, West Texas Intermediate (WTI), Brent Blend, and Dubai Crude. Other well-known blends include the OPEC Reference Basket used by OPEC, Tapis Crude which is traded in Singapore, Bonny Light used in Nigeria, Urals oil used in Russia and Mexico's Isthmus. Energy Intelligence Group publishes a handbook which identified 195 major crude streams or blends in its 2011 edition.
The Deutsche Bank Liquid Commodity Index (DBLCI) was launched in February 2003. It tracks the performance of six commodities in the energy, precious metals, industrial metals and grain sectors. The DBLCI has constant weightings for each of the six commodities and the index is rebalanced annually in the first week of November. Consequently, the weights fluctuate during the year according to the price movement of the underlying commodity futures.
From the mid-1980s to September 2003, the inflation adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. Then, during 2004, the price rose above $40, and then $60. A series of events led the price to exceed $60 by August 11, 2005, leading to a record-speed hike that reached $75 by the middle of 2006. Prices then dropped back to $60/barrel by the early part of 2007 before rising steeply again to $92/barrel by October 2007, and $99.29/barrel for December futures in New York on November 21, 2007. Throughout the first half of 2008, oil regularly reached record high prices. Prices on June 27, 2008, touched $141.71/barrel, for August delivery in the New York Mercantile Exchange, amid Libya's threat to cut output, and OPEC's president predicted prices may reach $170 by the Northern summer. The highest recorded price per barrel maximum of $147.02 was reached on July 11, 2008. After falling below $100 in the late summer of 2008, prices rose again in late September. On September 22, oil rose over $25 to $130 before settling again to $120.92, marking a record one-day gain of $16.37. Electronic crude oil trading was temporarily halted by NYMEX when the daily price rise limit of $10 was reached, but the limit was reset seconds later and trading resumed. By October 16, prices had fallen again to below $70, and on November 6 oil closed below $60. Then in 2009, prices went slightly higher, although not to the extent of the 2005–2007 crisis, exceeding $100 in 2011 and most of 2012. Since late 2013 the oil price has fallen below the $100 mark, plummeting below the $50 mark one year later.
Western Canadian Select (WCS) is a heavy sour blend of crude oil that is one of North America's largest heavy crude oil streams. It was established in December 2004 as a new heavy oil stream by EnCana, Canadian Natural Resources Limited, Petro-Canada and Talisman Energy Inc.. It is a heavy blended crude oil, composed mostly of bitumen blended with sweet synthetic and condensate diluents and 21 existing streams of both conventional and unconventional Alberta heavy crude oils at the large Husky Midstream General Partnership terminal in Hardisty, Alberta. Western Canadian Select—the benchmark for emerging heavy, acidic crudes—is one of many petroleum products from the Western Canadian Sedimentary Basin oil sands. Husky Energy joined the initial four Founders in 2015.
The Canadian Crude Oil Index (CCI) serves as a benchmark for oil produced in Canada. It allows investors to track the price, risk and volatility of the Canadian commodity.
The Saint-Petersburg International Mercantile Exchange (SPIMEX) is a Russian commodity exchange. The offices of SPIMEX are located in Moscow, Saint Petersburg and Irkutsk. SPIMEX was incorporated in 2008.
The posted price of oil was the price that oil companies offered to purchase oil from oil-producing governments. This price was set by the oil companies and used to calculate the share of oil revenues that oil producing countries would receive. Between 1957 and 1972, the posted price was greater than the market price of crude oil. Between 1961 and 1970 the market price hovered between $1.30 and $1.50 per barrel, while the posted price was a constant $1.80.
On 14 September 2019, drones were used to attack the state-owned Saudi Aramco oil processing facilities at Abqaiq and Khurais in eastern Saudi Arabia. The Houthi movement in Yemen claimed responsibility, tying it to events surrounding the Saudi Arabian intervention in the Yemeni Civil War and stating they used ten drones in the attack launched from Yemen, south of the facilities. Saudi Arabian officials said that many more drones and cruise missiles were used for the attack and originated from the north and east, and that they were of Iranian manufacture. The United States and Saudi Arabia have stated that Iran was behind the attack while France, Germany, and the United Kingdom jointly stated Iran bears responsibility for it. Iran has denied any involvement. The situation has exacerbated the Persian Gulf crisis.
On 8 March 2020, Saudi Arabia initiated a price war on oil with Russia, facilitating a 65% quarterly fall in the price of oil. In the first few weeks of March, US oil prices fell by 34%, crude oil fell by 26%, and Brent oil fell by 24%. The price war was triggered by a break-up in dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts in the midst of the COVID-19 pandemic. Russia walked out of the agreement, leading to the fall of the OPEC+ alliance. Oil prices had already fallen 30% since the start of the year due to a drop in demand. The price war is one of the major causes and effects of the ensuing global stock-market crash.
Economic turmoil associated with the COVID-19 pandemic has had wide-ranging and severe impacts upon financial markets, including stock, bond, and commodity markets. Major events included a described Russia–Saudi Arabia oil price war, which after failing to reach an OPEC+ agreement resulted in a collapse of crude oil prices and a stock market crash in March 2020. The effects upon markets are part of the coronavirus recession and are among the many economic impacts of the pandemic.
References
- ↑ Argus Sour Crude Index - Methodology and specifications guide [ permanent dead link ]
- ↑ Bloomberg - Saudi Aramco to Use Sour Oil Index as U.S. Benchmark, Drop WTI
- ↑ Reuters - Kuwait to price U.S. oil cargoes on ASCI
- ↑ Bloomberg - Iraq Will Use Argus Crude Price Formula From April
- ↑ Reuters - Iraq to switch to ASCI from U.S. crude futures
- ↑ Reuters - ICE to launch Argus sour crude futures contracts
