 Crude Oil

 Oil Barrel
 Indices
 Contracts
 Conclusion

 Crude Oil Pricing

 Pricing of Physical Crude Oil Trades
 Crude Oil as an Input Cost to Refiners
 Conclusions

 PRICE OF OIL

 Future projections
 Oil depletion
 Peak Oil

 Impact of declining oil price

 What sets Oil Prices?
 How are crude oil prices evaluated?

 HOW THE OIL MARKET HAS MOVED TO A NEW PRICING MECHANISM

 Commodities: Crude Oil

 Understanding Crude Oil Contracts

 Calculating a Change in Price

 Crude Oil Exchanges

 Facts About Production

 Factors That Influence Crude Oil's Price

 Conclusion

Crude Oil
The price of oil as discussed in the news is the price of a commodity different from the gasoline you fill
your car with; it is in fact crude oil. Crude oil is the base product that gets processed into gasoline at oil
refineries. So, if the price of oil goes up, the price of gas goes up. However, there are a number of other
factors affecting the price of gasoline and that's why the gas price doesn't always fall with the price of
oil. Refining capacity can rise and fall. If a major refinery develops problems and has to shut down, then
the amount of gasoline that can be produced falls. The price of gasoline rises because of shortages, but the
price of crude oil will fall because of gluts.

Transport costs can also affect both the price of crude oil and the price of gas as the oil needs to be taken
to the refineries and then the gas needs to be distributed from the refineries to gas stations. So if the price
of transport rises significantly on any stage of this supply chain, the pump price of gas will increase
irrespective of what the price of crude is doing.

The USA consumes much more oil than it produces, so if some major oil producing countries unexpectedly
withdraw their oil from the market as happened during the 1973 oil crisis, the economies of the USA and
the developed world can suffer long-term damage. For this reason, the Federal government created a vast
oil storage facility called the Strategic Petroleum Reserve, or SPR. The President can take the decision to
release oil from this reserve to balance out any sudden drop in the supply of reasonably priced oil. Thus,
the nation has a mechanism to protect against sudden spikes in the price of oil. To limit consumption,
state and Federal governments can increase the price of gas by imposing taxes and levies on oil
companies, refineries and gas stations.

Oil Barrel
Oil refineries buy their crude oil by the barrel. Let's say a refinery buys 1,000 barrels of oil for delivery and
a set of trucks filled up with oil drums starts rolling in its direction. Surprisingly these trucks will not be
carrying 1,000 drums of oil because the volume of a (standard) oil drum differs from the volume of an oil
barrel: 55 gallons for an oil drum versus 42 gallons for an oil barrel. Hence the trucks will be carrying 763
drums of oil (same volume as 1,000 barrels of oil, just fewer drums). Think of a barrel more as a unit of
measure, like a gallon or a litre rather than as a container. When you hear talk of the price of oil, that
price is given per barrel, which is abbreviated to "bbl." A barrel of oil is the equivalent of 42 gallons, or 159
litres. Thus, if you read that the price of oil is $104 that means for 42 gallons of crude oil.

Indices
Anyone can strike a deal and there is no law dictating the price. However, whenever you buy something,
you want to know what the going rate for that item is, and the oil industry is no different. There are a
number of published indices around the world that the oil industry uses. The first of these is the West
Texas Intermediate price set at the New York Mercantile Exchange. The second is the Brent Crude Index,
which is set at the Intercontinental Exchange in London and the third is the OPEC Basket, which is an
average of the prices achieved in all OPEC countries and is managed from OPEC's headquarters in Vienna.

Each index rises and falls depending on how many people want to buy oil on that particular day. Many of
the people who invest in oil at these exchanges never actually intend to take delivery. These people just
want to buy a contract at a low price and then sell it on at a higher price. When speculation enters a
market then many new factors enter the pricing structure. Political uncertainty in some part of the world
could disrupt supply and so the price goes up. Trade figures of a major manufacturing nation, like China,
might show that country is slipping into recession. That would reduce demand for oil, thus the price
would fall on all the indices in the world.

Countries that produce more oil than they consume, like Saudi Arabia and Russia, like the price of oil to
go up. Countries that produce little oil, like Japan and Italy, like the price of oil to go down. In the US, it
would be in the general economy's interests for oil prices to be low, but a low oil price would damage large
American corporations that have influence with national politicians through election fund contribution
and targeted job creation. Thus, some countries may try to drag the price of oil down, while others may try
to force the price up. Politics, then, plays a major role in the price of oil registered on these indices.

Other investor-related factors may also influence the price of crude oil. The banking crisis of 2008 saw
savers looking for places to store their money when it looked like banks might go bust, so they poured
money into commodities, including oil. Thus, the price of oil rose despite a general collapse in demand.
Speculators like volatility because they then don't have to wait too long before they can sell on their
investments at a higher price. Speculators, and the information providers that support them, over-react to
world news to try to force dips and peaks so they can buy and sell. Thus, there are many non-oil related
factors that can influence the price of oil set on the three main indices.

Contracts
Buyers of oil for delivery rarely pay the index price. However, the price of a particular index is a factor in
the contract price mechanism. Not all oil in the world is the same. Some oil is quicker and cheaper to
refine than others. Thus, you would likely pay more for oil that is easy to process, than for oil that is
expensive to process. The location of the oil and transport capacity is also a factor. A contract to buy oil in
Saudi Arabia would carry a lower price than a contract to buy a tanker load of oil that is just off the coast
from a refinery. Therefore, the two factors of oil properties and location influence the price paid on
contracts for delivery regardless of what the price of WTI or Brent crude is.

Oil companies understand the short-termism of speculators and so oil price contracts tend to work on the
average price over a certain period. Rather than striking a price at the Brent Crude Index price on the day
of delivery minus $3, a contract is more likely to take the price from the index averaged across the week of
delivery and then apply a premium or a discount. This avoids a buyer being hit by bad news on the day of
delivery jacking up the Index for a few days.

Although the WTI index is based in America, the Brent Crude Index is based in Europe and the OPEC
Basket is based mainly on oil prices in Arabia, contracts for oil do not have to rely on the price of the
closest Index. Thus, American buyers may strike a price based on the Brent crude index, even though they
are buying oil from Arabia.

All these factors boil down to oil price indices operating as "benchmarks" for the oil industry rather than a
common price. The relative movements of the indices do affect the price oil companies charge for oil, but
the actual price is a matter of individual contracts accounting for many different factors rather than a
global standard price.

Conclusion
The index prices of crude oil are important throughout the oil industry. However, if you are interested in
how much buyers actually pay, do research the contract terms arrived at for individual deals. For
example, the China National Petroleum Corporation recently signed a joint venture with the UAE's Abu
Dhabi National Oil Company. This deal would undoubtedly grant cheaper oil prices to China than those
listed for the OPEC Basket, of which Abu Dhabi's oil market is a constituent. Taxes, politics, transport
networks, geography, economic expansion and the weather all play a part in the complex calculation of
setting the level of oil price indices. However, deal-making, contract conditions, side benefits and
commercial interests override all other factors when setting the price for individual oil supply contracts.

Crude Oil Pricing

Please refer to the International Energy Agency Oil Market Report for the latest information and
data on crude oil prices and on the international oil market - including key data on supply, demand,
stocks, prices and refinery activity. See omrpublic.iea.org/.

In general, crude oil is sold through a variety of contract arrangements and in spot transactions. Oil
is also traded on futures markets but not generally to supply physical volumes of oil, more as a
mechanism to distribute risk. These mechanisms play an important role in providing pricing
information to markets.

In fact, the pricing of crude oils has become increasingly transparent from the 1990s onwards
through the use of marker crudes such as:

 West Texas Intermediate (WTI – USA)

 Brent (Europe, Africa and Asia)

 Dubai and Oman (Middle East)

 Dubai, Tapis and Dated Brent (in Asia-Pacific)

The main criteria for a marker crude is for it to be sold in sufficient volumes to provide liquidity
(many buyers and sellers) in the physical market as well as having similar physical qualities of
alternative crudes.

In addition, the marker crude should provide pricing information. WTI does this through its use on
the New York Metals Exchange (NYMEX) as the basis of a futures contract where trade is equivalent
to many hundreds of millions of barrels per day, even though physical WTI production is less than 1
million barrels per day. A futures contract for crude oil is a promise to deliver a given quantity of
crude oil but this rarely occurs as participants are more interested in taking a position on the price
of the crude oil. Futures markets are a financial instrument to distribute risk among participants
with the side effect of providing transparency on the pricing of crude oil.

Brent offers pricing information based more on the physical trading of oil through spot trading, and
forward trading but also offers futures trading but not to the same extent as WTI.

In Asia there is no futures exchange where crude oil is traded and which would provide pricing
information to the same extent as WTI and Brent. In Asia the pricing mechanism for say Tapis, a
marker for light sweet crudes in the region, is based on an independent panel approach where
producers, refiners and traders are asked for information on Tapis crude trades.

Pricing of Physical Crude Oil Trades

Generally this is based on a formula approach where a marker crude is used as the base and then a
quality differential (premium/discount) as well as a demand/supply (premium/discount) is added
depending on the crude being purchased.

Thus in times of tight supply this premium will rise and gradually drag up the Marker crude price,
whilst in times of surplus supply, a reduced premium or even a discount will drag down the Marker
crude price. Of course big changes, announcement or events that can significantly influence crude
supply levels will sometimes result a large step change in the prices of crude oil (eg. OPEC
announcements, civil unrest or wars, hurricane activity, major refinery shutdowns or outages etc).

That is, crude oils being purchased do not always slavishly follow marker crudes. Marker crudes are
indicators of what is happening in regional markets.

Crude Oil as an Input Cost to Refiners

It is true to say that the cost of crude oil is the major input cost for refiners. However, the
relationship between such a cost and the final price for a petroleum product produced from that
crude, such as petrol or diesel, is not as direct as one would think.

There are, for instance, additional petroleum product markers which give a guide to prices. That is,
prices are not just a function of cost-push, but are also strongly influenced by demand-pull.
For example, USA environmental requirements for gasoline (petrol) have at times pushed up the
prices in the USA by significantly more than the movements in crude prices. This is the market
working as refiners who see these prices work hard to increase production to capture some of these
high prices before they dissipate under competitive pressure – both from within the USA and from
the resulting massive influx of product cargoes from other producing centers in the world.

There are also a number of other variables which affect the price of products such as petrol. In
addition the perception of the purchasers and sellers in the market as to the price risk over time can
also add or subtract premiums to the product marker price.

For information on price markers for the Australian market, see:

 Facts – About Prices & the Australian Fuel Market

Conclusions

Prices of crude oil markers and petroleum product markers are affected by a myriad of factors
including:

 overall supply/demand for crude

 supply/demand for petroleum products

 freight rates

 competition in the crude markets

 competition in the regional and domestic markets for petroleum products.

They all have a role in determining the final price charged to consumers and the role that each of
these elements plays can change over time. It is this very complexity in markets which makes it very
difficult to determine a theoretical price as part of regulation in markets because there may be a
perception that because the theoretical price is different from the market price that the market price
is 'not fair' for some reason.

 
PRICE OF OIL

The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil.

In North America this generally refers to the WTI Cushing Crude Oil Spot Price West Texas Intermediate
(WTI), also known as Texas Light Sweet, a type of crude oil used as a benchmark in oil pricing and the
underlying commodity of New York Mercantile Exchange's oil futures contracts. WTI is a light crude oil,
lighter than Brent Crude oil. It contains about 0.24% sulfur, rating it a sweet crude, sweeter than Brent.
Its properties and production site make it ideal for being refined in the United States, mostly in the
Midwest and Gulf Coast regions. WTI has an API gravity of around 39.6 (specific gravity approx. 0.827) per
barrel (159 liters) of either WTI/light crude as traded on the New York Mercantile Exchange (NYMEX) for
delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange (ICE, into which
the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe. Cushing,
Oklahoma, a major oil supply hub connecting oil suppliers to the Gulf Coast, has become the most
significant trading hub for crude oil in North America.

The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific
gravity or API and its sulphur content, and its location. Other important benchmarks include Dubai,
Tapis, and the OPEC basket. The Energy Information Administration (EIA) uses the imported refiner
acquisition cost, the weighted average cost of all oil imported into the US, as its "world oil price".

The demand for oil is highly dependent on global macroeconomic conditions. According to theInternational
Energy Agency, high oil prices generally have a large negative impact on global economic growth.[1]
Future projections
Main articles: Oil depletion and Peak oil

Peak oil is the period when the maximum rate of global petroleum extraction is reached, after which the
rate of production enters terminal decline. It relates to a long-term decline in the available supply of
petroleum. This, combined with increasing demand, will significantly increase the worldwide prices of
petroleum derived products. Most significant will be the availability and price of liquid fuel for
transportation.

The US Department of Energy in the Hirsch report indicates that “The problems associated with world oil
production peaking will not be temporary, and past “energy crisis” experience will provide relatively little
guidance.”[35] The 2014 United Nations World Economic Situation and Prospects report notes that "Oil
prices were on a downward trend in the first half of 2013 (after a spike in January and February caused
by geopolitical tensions with Iran), as global demand for oil weakened along with the deceleration in world
economic growth overall." [36]

Oil depletion is the decline in oil production of a well, oil field, or geographic area.[1] The Hubbert peak
theory makes predictions of production rates based on prior discovery rates and anticipated production
rates. Hubbert curves predict that the production curves of non-renewing resources approximate a bell
curve. Thus, according to this theory, when the peak of production is passed, production rates enter an
irreversible decline.[2][3]

The United States Energy Information Administration predicted in 2006 that world consumption of oil will
increase to 98.3 million barrels per day (15,630,000 m3/d) (mbd) in 2015 and 118 million barrels per day
in 2030.[4] With 2009 world oil consumption at 84.4 mbd,[5] reaching the projected 2015 level of
consumption would represent an average annual increase between 2009 and 2015 of 2.7% per year.

Peak oil, an event based on M. King Hubbert's theory, is the point in time when the maximum rate
of extraction of petroleumis reached, after which the rate of production is expected to enter terminal
decline.[1] Peak oil theory is based on the observed rise, peak, (sometimes rapid) fall, and depletion
of aggregate production rate in oil fields over time. Mostly due to the development of new production
techniques and the exploitation of unconventional supplies, Hubbert's original predictions for world
production proved premature.[2]

Hubbert's original prediction that US Peak Oil would be in about 1970 seemed accurate for a time, as US
average annual production peaked in 1970 at 9.6 million barrels per day.[3] However, after a decades-long
decline, the successful application of massive hydraulic fracturing to additional tight reservoirs caused US
production to rebound, hitting 9.7 million barrels per day in April 2015. [4] This made Hubbert's prediction
of inevitable decline after the peak, incorrect.

Peak oil is often confused with oil depletion; peak oil is the point of maximum production, while depletion
refers to a period of falling reserves and supply.

Some observers, such as petroleum industry experts Kenneth S. Deffeyes and Matthew Simmons, predict

negative global economy implications following a post-peak production decline and oil price increase
because of the high dependence of most modern industrial transport, agricultural, and industrial systems
on the low cost and high availability of oil. Predictions vary greatly as to what exactly these negative effects
would be.

Optimistic[2] estimations of peak production forecast the global decline will begin after 2020, and assume
major investments inalternatives will occur before a crisis, without requiring major changes in the lifestyle
of heavily oil-consuming nations. These models show the price of oil at first escalating and then retreating
as other types of fuel and energy sources are used.[5]Pessimistic predictions of future oil production made
after 2007 stated either that the peak had already occurred,[6][7][8][9] that oil production was on the cusp of
the peak, or that it would occur shortly.[10][11]
Impact of declining oil price

A major rise or decline in oil price can have both economic and political impacts. The decline on oil price
during 1985-1986 is considered to have contributed to the fall of the Soviet Union. [37]

Declining oil prices may boost consumer oriented stocks but may hurt oil-based stocks. [38][39] It is
estimated that 17-18% of S&P would decline with declining oil prices.

The oil importing countries like Japan, China or India would benefit, however the oil producing countries
would lose.[40][41][42] A Bloomberg article presents results of an analysis by Oxford Economics on the GDP
growth of countries as a result of the a drop from $84 to $40. It shows the GDP increase between 0.5% to
1.0% for India, USA and China, and a decline of greater than 3.5% from Saudi Arabia and Russia. A stable
price of $60 would add 0.5 percentage point to global gross domestic product. [43]

Katina Stefanova has argued that falling oil prices do not imply a recession and a decline in stock prices.
[44]
 Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, had earlier written that that positive
impact on consumers and businesses outside of the energy sector, which is a larger portion of the US
economy will outweigh the negatives.[45]
What sets Oil Prices?  By STEVE AUSTIN for OIL-PRICE.NET, 2014/05/05
Did you ever wonder what makes the price of oil move and why movements in the price of oil don't always
feed through to the gas station's prices? Who decides the price of oil and how do all the oil businesses in
the world hedge against sudden movements in the price? Although there are well known oil price indices
in the world, the mechanism that sets their levels involves a range of factors from politics to transport
networks. Buyers of oil for physical delivery rarely pay the price listed on the WTI index or the Brent crude
index. In this article, we take a look at how crude oil prices are calculated and why gasoline prices are not
always linked to the price of crude oil.

How are crude oil prices evaluated?

The benchmark spot oil price is purely supply/demand driven.These prices are heavily influenced by
paper trading (which includes refineries' price hedging efforts, not just speculators) and are are entirely
market-driven for hypothetical deliveries of non-existent oil of the benchmark type. Specific oils contracted
for actual delivery are then priced on a discount or premium to the benchmark based on each refinery's
capabilities. There isn't really a generic formula that works across the entire market, just rules of thumb.
Each buyer has a different ability to process oil into refined products, so some oil shipments are worth
more or less to particular people. Each refinery has its own internal pricing formulas based on the crude
assay and the refinery's configuration. Buyers usually try to set up long-term production contracts with a
specific source that has favorable characteristics for the refinery's equipment. 

See this question for more info on the types of crudes and how they affect refining: What are the different
types of oil and what is different about them?

Sulfur content always reduces crude value. I am not aware of any exceptions to this.

Broadly speaking, lighter crudes are worth more, because they produce more gasoline.
That usually implies crude with lower density (which is equivalent to higher API gravity). The most
valuable part of the barrel of crude is the C5-C12 range (Cn meaning the count of carbon atoms in the
hydrocarbon molecules). However, a light oil can be less valuable if it contains too much of the smog-
causing components like benzene (C6) that evaporate easily and contribute to air pollution. The type of
hydrocarbon molecules matters just as much as the size.

In some countries, diesel is used more than gasoline so refiners will prefer a slightly heavier oil than in
gasoline-focused regions. The gasoline/diesel ratio can be adjusted somewhat via processing equipment,
but it's always easier to start with the best oil for the target output.

So the light/heavy scale is really an oversimplification. The refining value of a crude oil cannot be
determined from a few simple parameters -- you really do need a full chemical assay (Crude oil assay),
which includes at minimum the distilled fractions, vapor pressure (Reid vapor pressure), sulfur content,
metal content, and so forth.
HOW THE OIL MARKET HAS MOVED TO A NEW PRICING MECHANISM
AUG 30, 2013 || NATE TAPLIN

 
Since mid-April oil has pointedly outperformed  metals. While diggers have been beaten up on concerns
about Chinese demand and potential large-scale supply responses, the drillers have been given something
of a pass. We would argue this is a miscalculation since the oil sector faces similar structural challenges
to the rest of the commodities complex. In particular, new supply responses will apply downward pressure
on prices for years to come—a potential boon for any global economic recovery.
The commodity bull market of the last decade has been driven by rapid demand   growth   (especially
China),   lagged  supply   responses   and continually  escalating  production   costs.  However, Beijing is
edging toward  a  less investment-driven  model of growth, just at the moment when large scale supply
responses are coming  on stream. This double whammy suggests that any fundamental price support will
need to rest on the third leg of the stool, in the shape of rising production costs.
 
Watch: James Burkhard on U.S. Oil and Gas Production Growth
 
Consistently rising commodity prices have spurred producers to develop ever smarter  (and  more
expensive)  technologies  to  tap  inaccessible reserves. In  the  case  of  crude  oil,  the  International 
Energy  Agency estimates that about half of the oil being pumped from the Bakken shale in North  Dakota
becomes uneconomic at  prices below $60-70 a barrel. We know that markets are made at the margin and
it seems likely that these “tight” U.S. oil deposits will increasingly be the key marginal play that dictates a
medium term price floor.
The IEA estimates that 40 percent of incremental oil output through 2018 will come from North America,
with the US accounting for three quarters of that sum. By this point OPEC producers are expected to
contribute only 30 percent of new supply. On  the  assumption  of a fairly steady-state world through to
2018 these new supply realities will have engineered a global energy reset. For a non-North American
producer to be the “marginal producer” oil demand would have to disappoint by about 20 percent .
The commodity bull market of the last decade had three key drivers: demand growth, supply bottlenecks
and rising production costs. Crude oil prices look to be dictated by the new marginal producer – the
United States.
There are, of course, scenarios  where prices fall much  below the  U.S. dictated minimum. That might
include China’s economy suffering a hard economic landing, or one of the low cost producers facing a
fiscal crisis and acting to boost government coffers by turning on the spigots. In this event, loss-making
U.S. producers would quickly close down production. Oil prices would likely fall toward the marginal cost
faced by the “next” marginal producer— most likely a much lower cost OPEC member.
Still, it is noteworthy that the long end of the oil futures market points to an outcome dictated by U.S.
producers.  Both the WTI contract (the U.S. benchmark) and the internationally-dictated Brent contracts
for delivery in 2016 have for the last year traded in a tight range, about $15 above the marginal cost of
U.S. “tight” oil  production. Interestingly this coincides with  the  period  since  unconventional  US  oil
supplies  started  really gushing. This futures market convergence has occurred despite the spot prices for
the two oil markets trading at sharply different price levels, with Brent maintaining its outperformance.
Our conclusion is that the oil market has moved to a new pricing mechanism, which absent some
shock should cause a gradual easing of prices toward levels dictated in the US. As a result, Brent will
likely face downward pressure over the next two to three years, largely reflecting softer  Chinese  demand.
For  oil  investors,  risks  probably  lie  on  the downside with the non-trivial risk that one of the larger
producers elects to crank up supply and prices get driven even lower. In this regard, oil faces very similar
drivers to the rest of the commodity complex.
Such an outcome will be supportive of non-inflationary global growth (see Goldilocks And The Ten Bears).
Financial markets should also benefit from the liquidity boost caused by cheaper oil, to an extent
offsetting the tightening effect of the Federal Reserve starting  to unwind  its current monetary policy
settings.
Commodities: Crude Oil

Crude oil is a naturally-occurring substance found in certain rock formations in the earth. To extract the
maximum value from crude, it needs to be refined into petroleum products. The best-known of these is
gasoline, or petrol. Others include liquefied petroleum gas (LPG), naphtha, kerosene, gas oil and fuel oil.

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. These oil wells were developed 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.

In the crude oil industry, there are oil names (such as Brent Light Crude Oil and Bonny Light) and there
are oil types (such as light, heavy, sweet and sour). Light oil has a low density viscosity, while heavy oil is
of higher density. Sweet oil has less sulfur, and sour oil has excessive sulfur. The world market prefers
light, sweet crude oil, largely because it requires less refinement and production time before going to
market. (Find out how to stay on top of data reports that could cause volatility in these markets in Become
An Oil And Gas Futures Detective.)

A sample commodity futures contract for crude oil is shown in the following table.

Crude Oil Contract Specifications

Ticker Symbol Open Outcry: CL (NYMEX)

Contract Size 1,000 U.S. barrels (42,000 gallons)

Deliverable Grades Specific domestic crudes with 0.42% sulfur by weight

or less, not less than 37 degrees API gravity nor more
than 42 degrees API gravity. The following domestic
crude streams are deliverable: West Texas
Intermediate, Low Sweet Mix, New Mexican Sweet,
North Texas Sweet, Oklahoma Sweet and South Texas
Sweet.
Specific foreign crudes of not less than 34
degreesAPI nor more than 42 degrees API. The
following foreign streams are deliverable: U.K. Brent,
for which the seller shall receive a 30 cent per barrel
discount below the final settlement price; Norwegian
Oseberg Blend is delivered at a 55 cents–per–barrel
discount; Nigerian Bonny Light, Qua Iboe, and
Colombian Cusiana are delivered at 15 cent
premiums.

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 Trading terminates at the close of business on the

third business day prior to the 25th calendar day of
the month preceding the delivery month. If the 25th
calendar day of the month is a non-business day,
trading shall cease on the third business day prior to
the business day preceding the 25th calendar day.
 Last Delivery Day All deliveries are ratable over the course of the month
and must be initiated on or after the first calendar
day and completed by the last calendar day of the
delivery month.

Price Quote Dollars and cents per barrel.

Tick Size NYMEX: 1 cent per barrel ($10.00 per contract)

1. $10 per barrel ($10,000 per contract) for all

Daily Price Limit months. If any contract is traded, bid or
(Not applicable in offered at the limit for five minutes, trading is
halted for five minutes.
electronic markets)
2. When trading resumes, the limit is expanded
by $10 per barrel in either direction. If another
halt were triggered, the market would
continue to be expanded by $10 per barrel in
either direction after each successive five-
minute trading halt.

3. There will be no maximum price fluctuation

limits during any one trading session.

Understanding Crude Oil Contracts

Like every commodity, crude oil has its own ticker symbol, contract value and margin requirements. To
successfully trade a commodity, you must be aware of these key components and understand how to use
them to calculate your potential profits and loss.

For instance, if you choose to buy or sell a crude oil futures contract, you will see a ticker tape handle that
looks like this:

CL8K @ 105.52

This is just like saying "Crude Oil (CL) 2008 (8) May (K) at $105.52/barrel (105.52)." A trader buys or sells
a crude oil contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the
market multiplied by the actual value of the contract itself. In this instance, the crude oil contract equals
the equivalent of 1,000 barrels multiplied by our hypothetical price of $105.52, as in: 

$105.52 x 1,000 barrels = $105,520

Commodities are traded based on margin, and the margin changes based on market volatility and the
current face value of the contract. To trade a crude oil contract on the New York Mercantile
Exchange (NYMEX) a trader may be required to maintain a margin of $8,775, which is approximately 8%
of the face value. The margin amount will change in different market conditions, but the amount of
leverage provided by the futures markets makes it attractive for investors looking to gain exposure to oil
prices.
Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a crude
oil contract, a one-cent move is equal to $10. When determining NYMEX's crude oil profit and loss figures,
you calculate the difference between the contract price and the exit price, and then multiply the result by
$10. For example, if prices move from $105.52 to $110.83, you multiply the difference, which is $5.31, by
$10 to yield a contract value change of $5,310.

- Buy Sell Total Value

Crude Oil Contract $105.52  $110.83 531 cents or $5,310

Price (1 cent move =
$10)

Crude Oil Exchanges

Futures contracts for crude oil are traded at the New York Mercantile Exchange (NYMEX), Intercontinental
Exchange (ICE), Dubai Mercantile Exchange (DME), Multi Commodity Exchange (MCX), India's National
Commodity and Derivatives Exchange (NCDEX) and the Tokyo Commodity Exchange (TOCOM).

Facts About Production

One barrel of crude oil is the equivalent of 42 U.S. gallons. After the barrel of oil is refined, it yields
approximately 20 gallons of motor gasoline and seven gallons of diesel. With an additional 17 gallons of
petroleum byproducts, such as propane, ammonia and plastic materials, the total refining process has a
net gain of two gallons - 42 gallons go in; 44 gallons come out.

As mentioned, the types of crude oil are light/ heavy and sweet/ sour. Lighter, sweeter crude is in more
demand globally, but is becoming increasingly difficult to access. This has caused many investors on Wall
Street to question how much oil is actually being pumped from reserves versus how much oil is being
used. Emerging economies in both China and India have added to this intense debate.

In 2004, annual worldwide oil consumption was 30 billion barrels. This would not have been controversial,
except that new discoveries during the same time had fallen to eight billion barrels. By 2005, worldwide
demand for oil had reached 31 billion barrels, leaving worldwide emergency stockpiles nearly depleted for
37 days. While Saudi Arabia, Russia, and the U.S. are the top oil producing countries in the world, they
are having more difficulty meeting demands.

Currently, 62% of the world's accessible oil can be found in the Middle East, centered around five
countries: Saudi Arabia, United Arab Emirates, Qatar, Iraq and Kuwait. The fact that a protracted war on
terror in Iraq has halted production to a fraction of what it used to be is important to take into
consideration. Also understand that Qatarshares a natural gas field with Iran, considered by the U.S. as
part of the axis of evil, so two out of the five Middle East countries are not producing at full capacity.
(When the price of oil goes up, don't worry about how much gas is going to cost; get even by making a play
on the Canadian dollar. Find out how in Canada's Commodity Currency: Oil And The Loonie.)
Factors That Influence Crude Oil's Price
The price is influenced by the following factors:

 For the past 50 years, the price of crude oil has been denominated in U.S. dollars. With the
fluctuation in the value of the U.S. dollar and the prominence that newer currencies such as
the euro are gaining, OPEC is considering switching crude oil from a U.S. dollar quotation system
to either the euro or to a basket of multiple currencies. This could have an adverse affect on oil
prices in the short run. 
 In 1956, geophysicist M. King Hubbert made the dire prediction that oil would reach
a peak production level, flatten out, and eventually decline - following a bell curve pattern of
distribution. Eventually, the world would deplete all of the available oil. The peak, as calculated by
Hubbert, was alleged to have been hit in 1970. Since then, peak oil predictions have been
readjusted to account for current usage versus what is being pumped from the ground. (For more
on this phenomenon, see Peak Oil: What To Do When The Wells Run Dry.)

 Alternative methods of oil development are gaining prominence. Oil shale and tar sands are
becoming viable oil producing sources. As the price of technology begins to decrease, these sources
become more accessible to refiners. Methods for turning methane and coal into oil substitutes, first
discovered in the 1930s and during WWII, are being explored again. All of these alternatives have
the opportunity to upset crude oil prices.

 Global warming is considered an unintended consequence of using petroleum-based products. This

has led to an aggressive move to develop green energy sources such as electric cars, fuel cells,
ethanol, liquid natural gas and others, in the hope that they can potentially reduce the world's
reliance on crude oil. As these technologies become more common in the marketplace, they have
the ability to displace crude oil.

Conclusion
Crude oil is a commodity that the 21st century inherited from the 19th century, with all of its benefits and
drawbacks. Of all of the traded commodities, it has the broadest impact. How the world interacts with the
crude oil industry in the years to come will have a wide-reaching impact on the environment, the global
economy and our daily lives.