Oil and Natural Gas

Commodity Market
The Largest Commodity Market of the
World
ENERGY COMMODITIES
Highest by value- current market size.
Known as hard commodity as it is mined.
Highly tied to the political stability of the main countries.
Oil wells are used to release the oil from within
the earth. Some of the earliest developed oil
wells were drilled in China using bamboo poles
in 347 A.D. for the sole purpose of providing
enough fuel to create a thriving salt industry.
By the 1950s, crude oil became a global energy
source, which in effect killed the whaling
industry by making whale oil obsolete.
Main products-
West Texas Intermediate Crude Oil
Brent Crude Oil
Natural Gas
Heating Oil
Ethanol
Purified Terephthalic acid
O
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T
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p
e

API Gravity
Light-
Lower density Viscosity
Heavy-
Higher density Viscosity
Sulphur Content
Sweet-
Less Sulphur (<0.5%)
Sour-
Excessive Sulphur (>0.5%)
O
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N
a
m
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s

Brent
Light Sweet oil
from North Sea
West Texas
Intermediate
Light Sweet
benchmark in US
Dubai
Light Sour
Persian Gulf
OPEC Basket
13 different
regional oils
E
x
c
h
a
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g
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s

New York Mercantile
Exchange (NYMEX)
Intercontinental Exchange
(ICE)
Multi Commodity
Exchange (MCX)
Chicago Mercantile
Exchange (CME)
Tokyo Commodity
Exchange (TOCOM)
Size- $5tr
Approx. 7% of global GDP
share
Annual growth (2009-14)-
11.9%
OPEC & PETROLEUM MARKET
OPEC (Organization of the Petroleum Exporting Countries) is an international organization whose mission is to coordinate the
policies of the oil-producing countries.
IT was formed in 1960 in Baghdad Conference to try to counter the oil companies cartel, which had been controlling posted
prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price
stability until 1972.
The policy statement states that the countries have a right to exercise their sovereignty over their natural resources.
Headquarters at Vienna, Austria.
Sheikh Ahmed Zaki Yamani-
Former Oil Minister, Saudi Arabia;
Former General Secretary, OPEC
Its the longest running Economic Cartel in the
known history.
Because OPEC is an organisation of countries (not
oil companies), individual members have
sovereign immunity for their actions, meaning that
OPEC is not regarded as being subject to
competition law in the normal way
OPEC & PETROLEUM PRICES
Former Saudi Oil Minister Sheikh Yamani famously said in 1973: "The stone age didn't end because we ran out of stones."
When the future price of a
commodity (e.g. oil) is higher
than its present price, a
situation known as "contango",
it is more profitable for a
commodities producer to store
the commodity and sell it at a
later date.
This causes oil price volatility
through various channels:
For example, storage of a
commodity causes supply to be
reduced in the present, raising
spot prices, while expectations
regarding future supply increase
- thereby reversing the cycle,
which then causes contango all
over again.
CRUDE OIL GRADES
West Texas
Intermediate (WTI)
Brent Crude Dubai/Oman OPEC Reference
Basket
Composition Sweet, Light
0.31% Sulphur
39.6 API
Sweet, Light
0.37% Sulphur
38.06 API
Sour, Heavy
2% Sulphur
31 API
Weighted average of
oil from OPEC
countries
Region North America (major
hub- Oklahoma)
North Sea, Atlantic
Basin
Persian Gulf OPEC
Significance Benchmark for oil
and underlying in
North America
Benchmark price of
worldwide purchases
of nearly 2/3 oil trade
Benchmark Persian
Gulf Crude for
exports to Asia
Benchmark for oil
produced by OPEC
countries
Indexes traded NYMEX ICE, NYMEX DME OPEC Reference
Basket
Contract 1000 barrel (42000
gallons)
1 tick = $10
1000 barrel (159 m3)
1 tick = $10
1000 barrel (159 m3)
1 tick = $10
-
Trading World Oil Price by EIA Brent Index for cash
futures on ICE
Dubai benchmark -
Contract Specifications
Ticker Symbol Crude Oil-
CL (NYMEX) or WTI (ICE)
Natural Gas-
NG (NYMEX)
Contract Size 1,000 U.S. barrels (42,000 gallons) 10,000 million Btu (also available
at 25% & 50% of normal size)
Deliverable Grades Domestic crudes
<=0.42% sulphur; 37<API<42
Foreign crudes
<=0.42% sulphur; 34<API<42
Pipeline specifications in effect at
time of delivery
Contract Months All months
Trading Hours NYMEX Open Outcry: Monday-Friday 9am- 2:30pm EST
eCBOT Electronic: Sunday-Friday 6pm-5:15pm CST
Last Trading Day third business day prior to the
25
th
calendar day of the month
preceding the delivery month
three business days prior to the
first calendar day of the delivery
month
Last Delivery Day Last calendar day of the delivery month
Price Quote Dollars and cents per barrel Cents per million Btu (mmBtu)
Tick Size NYMEX: 1 cent per barrel ($10.00
per contract)
NYMEX: .1 cents per mmBtu
($10/per contract)
Crude Oil (CL)
2014 (14)
May (K) at
$108.52/barrel
(108.52)
Hence, contract size-
$108.52 x 1,000 barrels
= $108,520
CL14K @ 108.52
Natural Gas (NG)
2014 (14)
May (K) at
$10.946/mmBtu
(10.946
Hence, contract size-
$10.946x10,000mmBtu
= $109,460
NG14K @ 10.946
CRUDE OIL CONTRACTS
NATURAL GAS
The Natural Gas price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas
pipeline systems that draw supplies from the regions prolific gas deposits.
Natural gas is difficult to store or transport unless converted to Liquid Natural Gas.
There are many factors influencing the price of natural gas, the majority including weather, storage, production and
incremental supply from LNGs.
The spread between natural gas futures and electricity futures called the spark spread can be used to manage risk exposure
in the energy markets.
The futures contract is available for
trading on the Chicago Mercantile
Exchange's Globex electronic
trading platform nearly 24 hours
per day, and clears through the
New York Mercantile Exchange
clearinghouse.
SHALE OIL & GAS
Shale gas is natural gas that is found trapped
within shale formations, often independent of the Shale
Oil.
Shale Oil, also called Light Tight Oil by International
Energy Agency, is found in the Shale rock formation and
extracted by a process called Fracking.
Together Shale Oil & Gas are changing the global landscape of energy products and taking the centre of gravity away from the OPEC nations.