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5 Things To Know About Crude Oil

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5 Things To Know About Crude Oil

Prices of crude oil and slated to stay subdued. Yesterday, news reports stated that JP Morgan slashed its crude oil price forecast, citing increased production and peak seasonal refinery maintenance in October.

The bank forecast Brent crude prices at $54.50 (2015) and $52.50 (2016) per barrel, while lowering its WTI outlook to $48.50 (2015) and $46.50 (2016) per barrel.

Crude oil is one of the most widely used and actively traded commodities in the world. Here's what you need to know about its price.

1) WTI and Brent

The two most popular benchmarks for international oil prices are West Texas Intermediate, or WTI, which is a U.S. measure, and Brent crude, which covers oil located outside of the U.S.

WTI trades on the New York Mercantile Exchange, or NYMEX, and Brent trades on ICE, the InterContinental Exchange, a leading network of regulated exchanges and clearing houses for financial and commodity markets.

Brent crude has overtaken WTI as the global benchmark and is generally seen as a more accurate reflection of the true price.

Incidentally, the term 'Brent' comes from the formation layers of the oil field - Broom, Rannoch, Etieve, Ness and Tarbat.


Another common benchmark for crude oil prices is the OPEC Reference Basket, or ORB. This price consists of a weighted average of a mix of crude oils found in the OPEC region.

The Organization of the Petroleum Exporting Countries, or OPEC, was founded in Iraq in 1960. The member countries currently are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela.

OPEC produces 30 million barrels per day (bpd).

Saudi Arabia is considered to be the 'swing' oil producer. A swing producer is a country that changes its crude oil output to meet fluctuations in market demand. Saudi Arabia is seen as the world's major swing producer, in that it will cut or expand production based on total global output to maintain a certain oil price. At the height of the Libyan crisis, for example, Saudi Arabia increased production to offset the fall in supply from Libya.

Besides Brent, WTI and ORB, another benchmark to note is Oman Crude which trades on Dubai Mercantile Exchange, or DME.

3) Metrics used for classification

The American Petroleum Institute gravity, or API gravity, is a statistic that is used to compare a petroleum liquid's density to water. Light crude oil has an API on the higher side of the scale, while heavy oil has a reading that falls on the lower end of the range.

Accordingly, crude oil is classified as light, medium, or heavy, according to its measured API gravity.

- Light Crude: API gravity > 31.1°API

- Medium Crude: API gravity between 22.3°API and 31.1°API

- Heavy Crude: API gravity < 22.3°API

How sweet a petroleum is depends on the sulfur content of the underlying fuel, with 0.5% being a key benchmark. When oil has a total sulfur level greater than half a percent, it is considered 'sour', while a content less than 0.5% indicates that an oil is 'sweet'.

End users generally prefer sweet crude as it requires less processing in order to remove impurities than its sour counterpart.

WTI and Brent are considered sweet crudes and come primarily from the Central U.S. and North Sea region respectively. Oman Crude mainly comes from the Middle East region and is considered less sweet compared to WTI and Brent. Sumatran Light, from the island of Sumatra, is a light, sweet crude. Tapis is of extremely high quality and very light and very sweet. It comes from a single field in Malaysia and at one time was referred to as the world's costliest oil. Bonny Light comes from Nigeria and is a light, sweet oil. Isthmus-34 Light is a sour crude produced in Mexico with an API gravity of 33.74 degrees and a sulfur content of 1.45%.

4) Oil prices and economies

Oil prices affect economies in different ways and in varying degrees.

Russia is one of the world's largest oil producers. According to a BBC report, Russia loses about $2 billion in revenues for every dollar fall in the oil price.

On the other hand, India benefits from falling crude prices. The country imports 80% of its oil needs. Analysts say that a $25 fall in crude is like a notional $10 billion stimulus for the Indian economy.

A recent report in Business Standard reported that the government had budgeted for an average crude oil price of $70 a barrel for this financial year. If the average price of $58 a barrel is sustained for the rest of the year, it will lead to a saving of Rs 78,000 crore in companies' import bill, and of around Rs 10,800 crore in the government's subsidy bill. Every $1 fall in crude oil prices brings the import bill down by Rs 6,500 crore, and the government's subsidy burden is reduced by Rs 900 crore.

5) Oil prices and companies

Lower prices impact crude oil exploration and producing companies - Oil and Natural Gas Corp Ltd. (ONGC), Oil India Ltd (Oil India) and Cairn India Ltd (Cairn India).

Profitability gets impacted due to a drop in crude realisation — the margin derived from sales to oil refining companies. Drilling companies such as Aban Offshore, Dolphin Offshore and Jindal Drilling could also get hit due to lower exploration and production expenditures from oil and gas producers.

According to the World Bank, if the agreement reached with Iran in July is ratified, sanctions by the U.S. and the European Union will be removed in return for Iran decelerating its nuclear programme. The Bank forecasted global oil prices to drop by $10 per barrel next year because Iran can resume its exports of crude oil. This would result in prices staying low, putting further pressure on the revenues and profits of the companies that are producing crude oil in India.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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