Determining the price of oil

28th January 2016, Comments 0 comments

The oil market is a complex financial arena where ultimately prices of crude are determined by supply and demand factors battling against one another.

- Three types of market -

Since the second half of the 1970s, oil market transactions have gradually replaced the old system of "producer prices", whereby a dominant supplier or suppliers of crude would impose a reference price on buyers.

Today there are three types of oil markets. On the physical "spot" market, delivery of oil is almost immediate following a transaction.On the physical "forward" market, the delivery occurs but not immediately.

Finally, on the "futures" market, investors buy or sell future intentions to hand over a quantity of oil. The timeline can vary from several months to years, while the seller and buyer virtually never take receipt of oil and the deal remains a "paper" transaction.

Financial journalists mainly report on the "futures" market.

- Various operators -

The physical markets bring together private and public producers looking to sell, refiners seeking to buy and traders representing both sides.

The futures market brings together the same kind of buyers and sellers, but this time those who wish to hedge against changes in prices. It also attracts non-commercial operators who act as speculators, betting purely on the direction of future prices for financial gain, with no wish to ever physically take possession of oil.

- Several crude qualities -

There are more than 160 kinds of crude oil that can be refined into different product qualities, helping to determine trading prices.

The quality of a crude depends on its density and level of impurities such as sulphur which are extracted.

Pricing of the different grades of oil are based on the world's three main references.

Brent, a mixture of crude products found in the North Sea, is the European benchmark listed in London.

West Texas Intermediate (WTI) is crude oil produced in North America and listed in New York.

Finally, Dubai Light is produced in the Gulf.

- Price setting -

Oil prices are expressed in dollars per barrel, which is the equivalent of 42 US gallons or 158.9873 litres.

The physical prices act as references for the cost of "futures" oil.

US commodities reporting agency Platts is seen as the leading authority on providing market players with transparent pricing data, which it gathers daily from information provided by producers, consumers and traders involved in the buying and selling processes.

Using the data, Platts publishes one hundred indices covering crude and refined products headed for different destinations on various modes of transport. These are updated daily in Platts' specialist publication Oilgram Price Report.

© 2016 AFP

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