The document discusses global oil trade and pricing mechanisms. It provides background on the evolution of the oil industry from control by major companies to OPEC formation and increased trading. Key points include:
1) Crude oil is traded globally and benchmarks like Brent, Dubai, and WTI help determine prices. Trading occurs via long-term contracts, tenders, and spot markets.
2) OPEC was formed to coordinate policies among member countries and stabilize oil prices. It established production quotas but members do not always comply.
3) International oil prices are determined by supply, demand fundamentals, geopolitics, and speculation. Prices rose dramatically in the 2000s due to strong demand and limited
The document discusses global oil trade and pricing mechanisms. It provides background on the evolution of the oil industry from control by major companies to OPEC formation and increased trading. Key points include:
1) Crude oil is traded globally and benchmarks like Brent, Dubai, and WTI help determine prices. Trading occurs via long-term contracts, tenders, and spot markets.
2) OPEC was formed to coordinate policies among member countries and stabilize oil prices. It established production quotas but members do not always comply.
3) International oil prices are determined by supply, demand fundamentals, geopolitics, and speculation. Prices rose dramatically in the 2000s due to strong demand and limited
The document discusses global oil trade and pricing mechanisms. It provides background on the evolution of the oil industry from control by major companies to OPEC formation and increased trading. Key points include:
1) Crude oil is traded globally and benchmarks like Brent, Dubai, and WTI help determine prices. Trading occurs via long-term contracts, tenders, and spot markets.
2) OPEC was formed to coordinate policies among member countries and stabilize oil prices. It established production quotas but members do not always comply.
3) International oil prices are determined by supply, demand fundamentals, geopolitics, and speculation. Prices rose dramatically in the 2000s due to strong demand and limited
The document discusses global oil trade and pricing mechanisms. It provides background on the evolution of the oil industry from control by major companies to OPEC formation and increased trading. Key points include:
1) Crude oil is traded globally and benchmarks like Brent, Dubai, and WTI help determine prices. Trading occurs via long-term contracts, tenders, and spot markets.
2) OPEC was formed to coordinate policies among member countries and stabilize oil prices. It established production quotas but members do not always comply.
3) International oil prices are determined by supply, demand fundamentals, geopolitics, and speculation. Prices rose dramatically in the 2000s due to strong demand and limited
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PUTTING A PRICE ON
ENERGY From A Book Entitled Putting a Price on Energy: Oil Pricing Update by Energy Charter Secretariat (2011). BY Dr. BHAWANISINGH G. DESAI
GLOBAL OIL TRADE
INTRODUCTION Oil is the most important energy source, accounting for more than a third of the world primary energy mix. Crude oil is a global commodity. It has been traded internationally since soon after the modern oil industry started in Pennsylvania, the US, in the 1860s. Oil trading has come a long way from the stable, controlled system of the Majors, which ended in the late 1960s, OPECs quota system in the 1970s and the first half of the 1980s, market mechanism starting in the mid-1980s.
INTRODUCTION There are over 130 crude grades around the world. However, crude oil itself has almost no direct end use. Crude oil needs to be refined into petroleum products (gasoline (petrol), heating oil and other) to be consumed. It is the total value of the products processed from crude (called gross product worth or GPW) that determines the crude value. This does not mean that product prices set crude prices. The two are interactive. From the refiners viewpoint, GPW defines the upper limit of crude price.
Introduction Contd. FOB (Free on Board) is a price for crude or products at the loading port. while CIF (Cost, Insurance and Freight) is a price for crude or product at the destination. Buyers have to pay the additional costs of transport when buying crude or products at a FOB price, while In CIF prices include costs of transportation. Furthermore, the timing of the pricing is different. FOB prices are taken on the loading date CIF prices on the unloading date. It is more common for crude to be traded at a FOB price and for products at a CIF price.
Oil Trading - Evolution
Pre OPEC
Not much trading
Domination by seven sisters Integration across supply Chain Stable oil prices
Formation of OPEC
Post OPEC
Large imbalances between consuming Split in control of producing assets Split in refining & marketing assets and producing Trading evolved in big way regions - huge Volatility in oil market trading potential
OPEC What is OPEC? The Organisation of Petroleum Exporting Countries (OPEC) is a voluntary Organisation with objective to Co-ordinate and unify petroleum policies among Member Countries, in order to secure fair & stable prices for producers regular supply of petroleum to consuming nations; fair return on capital to those investing in the industry.
Why was it formed?
Cheap oil flowing from Russia. Western companies having oil fields in Middle East, etc. cut oil prices affecting revenues of those countries.
Algeria 1.36
Ecuador 0.52 OPEC
MEMBERS AND PRODUCTION QUOTA (MMBPD)
Indonesia 0.87 Iran
3.82
Kuwait
2.53
OPEC
Libya
1.71
Nigeria
2.16
Qatar
1 Saudi Arabia
0.83
Saudi Arabia UAE
Founder members
8.94
2. Iran
2.57
Venezuela
3. Iraq
2.47
4. Kuwait
Iraq Angola
1.90
Source : IEA
5. Venezuela
Classification of Oil Trade
EXCHANGES
PAPER
OTC OIL TRADE
PHYSICALS
th physicals and paper market trades important in price discove
Over-the-counter (OTC) or off-exchange trading is done
directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via these facilities. An exchange has the benefit of facilitating liquidity, mitigates all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price is not necessarily made public information
Benchmark Crude A benchmark crude grade serves as the reference for other crude grades of similar qualities and locations. Arabian Light with its 5 MBD production volume, was the benchmark crude under OPECs official selling price system. WTI was selected as the reference grade when the New York Mercantile Exchange (NYMEX) launched the crude oil futures trading in 1983. Dubai displaced Arabian Light as the Middle East bench marker in the spot market in the late 1980s. Dubai now faces a problem of declining physical production. As a result, Oman plays an increasingly important role in the region and Oman in combination with Dubai is linked to other Middle East crude. Crude from various fields in Russia and the former Soviet republics is mingled when transported by Transnefts pipeline system and becomes the Urals grade.
There are other regional benchmark grades, such as Tapis (Malaysia), Minas (Indonesia) and Bonny Light (Nigeria). The Tapis field off Malaysia is operated by Exxon, and Malaysias state-owned Petronas is a regular seller of spot Tapis. Indonesian Minas is also traded regularly in the spot market.
Crude oil classification
API Gravity Measure of the gravity of oil API gravity = 141.5/(SG at 60 deg F) -131.5 Based on API gravity a crude oil is called light, medium or heavy
Sulphur content Low Sulphur (referred to as sweet in trade circles) High Sulphur (referred to as sour in trade circles)
CRUDE OIL TRADING
MECHANISM
Types of Crude Transactions
Barter Deal Barter deals remain important. The transactions typically involve trading of crude oil or petroleum products in exchange for goods, services or finances. E.g. : Middle East
Cargo Transaction Spot and forward contracts are based on cargo-by-cargo transactions Forward transactions: 1 to 3 months Spot transactions: 15 days to Maximum 1 month
Long/Short-Term Contract OPEC developed long-term contracts in crude trading OPEC countries in the Middle East sell their crude exclusively to refiners through long-term contracts. long-term contracts guarantee market access for their crude A party assumes a long position in the futures market when it agrees to buy an underlying asset on a certain future date for a certain specified price. Conversely, when a party agrees to sell an underlying asset on a certain future date for a certain specified price, the position it assumes is called short
In d e p e n d e n t O il C o m p a n ie s U S te m in o lo g y
O il P r o d u c e r s O x y , C o n o c o , e tc
O il R e fin e r ie s
T r a d in g c o m p a n ie s L ittle o r n o p h y s ic a l a s s e ts
Global Crude Oil Markets
SOUTH AMERICA
MIDDLE EAST
NORTH SEA
FAR EAST
CRUDE OIL MARKETS
US MARKET
CIS
W AFRICA
CENTRAL AMERICA
Oil Exports Market Structure
Implications for trading Middle east: Dominated by National Oil Companies viz. Saudi Aramco, ADNOC, NIOC, KPC, SOMO, etc. Crude oil usually sold on term contracts only.
Europe UK/Norway large exporters Statoil, NOC of Norway, a key player. UK producers are private companies
Oil Exports Market Structure
Implications for trading West Africa: Usually a 50/50 JV between National Oil Companies & MNCs Crude oil finds its way into spot market
South & Central America:
Venezuela & Mexico major exporters NOCs of respective country play a major role in exports Sold on term as well as spot basis.
North America:
Risk Profile Major Oil
Exporters High
Iraq Yemen
Medium High Medium Medium Low
Indonesia
Angola Russia Nigeria
Vietnam
Algeria
Iran
Libya
Venezuela
Malaysia S.Arabia Egypt Kuwait
Columbia
Oman
UAE Qatar
Mexico
Low UK
Distance from India
Norway
Canada
there is an inherent tendency for oil and for gas markets to move towards more competitive structures (with contractual structures and pricing mechanisms corresponding to the particular stage of market development).
INTERNATIONAL OIL PRICES
Prices are market determined the
prices are transparently decided in the market. INFLUENCING FACTORS.. Supply and demand fundamentals OPEC policies Political/economic developments in the exporting / consuming countries Weather conditions Alternative fuels (natural gas) Freight markets (environmental considerations - double hull)
Recent developments in international market
Geopolitical Factors Irans tussle with western West over its nuclear projects Threat of attack on US embassies in Gulf countries Civil unrest in Nigeria causing production stoppage. Unrest in Iraq
Spectacular demand growth
Oil demand growth rate peaked at 3.7% in 2004 and grew further 1.4 % in 2005 and 1.0% in 2006. (CAGR 1.5% in last 20 years) Strong demand from US, China, India and other
Recent developments in international market Tight refinery capacity Globally refineries struggling to cope with rising product demand No new refinery in US after 70s
Other factors Increased activities of speculators at NYMEX and IPE No production growth in Non OPEC oil producing countries.
Price Trends : Marker Crude Oils
(Annual Average Prices)
(Figs in $/bbl)
Prices rose following
introduction of price band production cut by OPEC
Demand surge, limited spare capacity with OPEC, Geopolitical tension, increasing activities of speculators pulled up prices
Prices fell following South East Asian financial crisis Prices remained strong on speculative inflow
2008: Average till 13th Oct 08
Oil Pricing Mechanism
PRICING In the oil market, trades are usually done on a variable market related pricing basis The price of the product being imported is not known at the time of purchase but is based on the price prevailing at the time of loading.
Oil Pricing Three dimensions Physical spot market activity Forward market activity with physical deliveries Exchange/Swap markets
Impact of variable market related pricing The
entire sale of physical oil in the international oil market is priced based on the last barrel of oil traded in the market. Eg: If the last cargo of a grade of crude oil is traded at a premium or discount, the same gets reflected in the sale/purchase price of the entire volume of crude oil. Term or spot purchases are same from the price perspective
Oil Pricing Price discovery mechanism is the key In the market today, Platts is the dominant and influential price publishing agency. In Asia Pacific market, Platts arrives at pricing of crude oil and petroleum products using: Market On Close method viz. trades at market close are reckoned for assessing the price. Trades done in their Trading Window are only considered
Other agencies like Petroleum Argus,
etc. publish their price assessments based on full day trades. However,
PRICE Price signals are visible to both producers and consumers. Both sides follow them with their decisions on production (output) and consumption to optimise their profit or overall benefit. Price is a signal from the market. It represents scarcity of the commodity in the market. When the price rises, demand is reduced to a level where supply matches demand (& vice versa). It also indicates a foresight of supply and demand, as expectations are factored in both supply and demand curves. Price is also a key signal for an efficient allocation of capital. A higher price relative to cost signals the need for new investment in production capacity, as the price signals a potential reward to investors. A low price discourages investment. It is worth noting that the oil and gas sector
What governs the Oil and Gas pricing? A philosophy
Oil and gas have many characteristics that distinguish them from other commodities, such as: 1) the high uncertainty linked to resource development and the high specificity of investment all along the energy chain from production to consumption, 2) the character of a natural resource, 3) the finiteness of the resource, exacerbated by the high concentration of reserves in about a dozen countries, 4) the involvement of two decision makers on the production side: producing company and resource owner, 5) the often highly inelastic demand for energy and its interaction with concentration and capacity restrictions on the supply side, and
CRUDE OIL TRADE - PRICING BASIS
PRICING BASIS FOR THE CRUDE OIL CONTAINS THE FOLLOWING ELEMENTS: LINKAGE TO A MARKER CRUDE OIL VIZ WTI, BRENT, DUBAI/OMAN, TAPIS, ETC PRICE OUT PERIOD VIZ. NO. OF QUOTES TO BE TAKEN AROUND/AFTER BILL OF LADING PUBLICATIONS TO BE CONSIDERED FOR THE PRICING BASIS. PREMIUM/DISCOUNT TO REFLECT QUALITY, LOCATION, ETC.
Irrespective of term or spot imports, the prices are finalised
on variable market related viz. price prevailing around time of loading will apply.
Oil Pricing- Spot market
Platts methodology(Singapore) Trading Window open from 4.00pm to 4.30 pm Singapore time. Trading lot is kept small (25000 barrels) called partials Markers like Dubai and Oman are traded. Minas & Tapis have been started recently Platts only considers deals finalised or firm bid/ask prices on offer during this window. Deals outside this
Crude Oil Pricing Challenges
Grades similar but not identica l
GPW
Marker
Hundre ds of grades
Little use directly
Needs Refinin g
Few grades traded activel y
Characteristics of a Marker Significant Production volumes
Versatile, good quality & desired by Refineries
Actively Traded in the Paper Market
Diversity of ownership
MARK ER CRUD E OIL
Export in shippable cargo lots
Free of destination restrictions
Marker crude oils
North/South American Region
North Sea, Nigerian, Angolan, Libyan
Grades etc
Middle East countries like Saudi Arabia,
Kuwait, Iraq Malaysian, Indonesian, Australian Grades
WTI BRENT DUBAI /OMAN TAPIS
VALUATION OF CRUDE OIL
Crude oils may be
similar but no two crude oils are identical in all their physical and chemical characteristics How are crude oils
Futures markets have grown considerably since the mid-1980s.
Oil companies and traders as well as financial institutions use the futures markets for hedging against the risk of price fluctuations. Meanwhile, a spot contract is an A futures contract is an agreement between two parties to buy or sell an agreement to buy or sell an asset today. asset at a certain future time for a certain price. A futures contract is a derivative. (A derivative is defined as a financial instrument whose value derives from the values of underlying assets. )
A futures contract is traded in the
exchange. Less than 5% of futures contracts result in physical delivery. A futures holder normally has the opposite position in the market, so that the two contracts cancel out
Like a futures contract, a forward
contract is a derivative, too. A forward contract is traded in the OTC market.
No discernable trend witnessed in quality differential between high
sulphur and low sulphur. Factors like regional supply/demand, tightness in HS crude availability etc have resulted in fluctuating differentials.
CRUDE PURCHASE - ILLUSTRATION
Item
African
Far East
Crude price
85.0
83.0
Freight
2.5
2.3
Refining Costs
0.5
0.4
88.0
85.7
Total costs
VALUATION OF CRUDE OIL
REFINING MARGIN GROSS PRODUCT WORTH(GPW) MINUS CRUDE OIL LANDED COST AT REFINERY MINUS VARIABLE OPERATING COSTS OF REFINERY = REFINING MARGIN.
Netback Pricing The netback pricing formula was: Crude oil price (FOB) = GPW in the spot market - fixed refining margin - transportation costs* * from the terminal in the oil-exporting country to the refinery in the oil-importing country)
GPW - AN ILLUSTRATION African crude Yield(%wt) Product price (Landed) VALUE ($/MT) ($) LPG 3.5 730 3.5 x 730 2555.0 NAPH/MS 20.0 800 20 x 800 16000.0 SKO 10.0 820 10 x 820 8200.0 HSD 51.0 810 51 x 810 41310.0 LSHS 10.0 500 10 x 500 5000.0 F& L 5.5 TOTAL 100.0 73065.0 GPW OF CRUDE GPW ($/bbl) $/BBL
= 73065.0 /100 = 730.65 $/MT
= 730.65 /7.38 = 99.00
CRUDE PURCHASE ILLUSTRATION
AFRICAN AND FAR EAST CRUDE OILS ARE AVAILABLE FOR IMPORT YIELD
Each stage of development of the world oil market has added new contractual structures to the previously existing ones: new structures appeared in addition to and not instead of previous
Price Formula Prior to 1979-80, long-term contracts accounted for most international trade. In the 1970s, crude was sold at official selling prices, which were set according to differentials to Arabian Light. The differentials were based on physical properties of the grades and distances to the markets. Saudi Arabia abandoned the official prices and established a netback pricing system in late 1985 to defend its market share. The netback pricing system tied the value of crude oil to the spot market prices of refined Products If a price formula is only linked to one benchmark crude, the particular characteristic and special market circumstances of the referred crude can have large effects. To avoid this, the use of crude baskets involving more than one benchmark is common. For instance, common formulas for crude sales of Arabian Light to the Asia-Pacific market (eastbound sales) are linked to the Dubai and Oman grades. While, those for Europe and North America (westbound sales) refer to ICE
Hedging and Speculation
Hedging means reducing a risk of loss in the business, resulting from an unexpected change in the value or cost of a product Companies hedge and fix unknown variables in order to concentrate on their main activities. The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday.
Gas Pricing The physical properties of oil and the fact that it is relatively easy to transport and to store facilitated the emergence of commodity pricing mechanisms in the oil sector. However, these considerations do not apply in the same way to natural gas. Will Gas Follow Oil to Become a Global Commodity? The situation with gas is more complicated.
The supply side
The indicator for liquidity is usually called churn. Churn is the ratio between traded volumes and delivered volumes. A churn of at least 15 is usually considered to be the threshold for a liquid market. The gas hubs in North America were created by industry at appropriate places, with Henry Hub in Louisiana being the most prominent and important of these. Henry Hub has a churn of about 100, indicating high market liquidity. For comparison: on the oil side the churn of WTI and Brent is about 500. the National Balancing Point (NBP), a notional point at which gas is traded in the UK, was created by regulation. The churn on the NBP rose to about 15 until 2004 and then dropped for some time to 10, placing the NBP at the edge of being considered as a liquid market.
The demand side
In all regions gas is used in the captive sectors, residential and commercial, which not only have little price elasticity but also a demand that is strongly dependent on weather conditions. The hubs that have developed in Continental Europe (Zeebrugge, Bunde and TTF in the Netherlands) all have a churn of clearly below 10, a sign of low liquidity. While Continental Europe has developed some hubs, Japan and Korea so far have no hubs at all: Korea only has one gas company, Japan has a maximum of two per region (one gas, one power utility) and there is practically no pipeline connection between the regions, although the companies do swap LNG cargoes with each other in short-term lend / borrow arrangements.
The role of LNG
The fast growing trade in LNG is regarded by some as a factor that will lead to the creation of a global gas market
Basic Element of Gas Tariff Design
FREIGHT MARKET
OIL TANKERS CLASSIFICATION
ULCC 3,20,000 & above VLCC 160,000-319,999 LR II 80000-159999 LR1 45000-79999 VLCC= Very Large Crude Carrier ULCC= Ultra Large Crude
MR 25000-44999
All fig in DWT
CHARTER PARTY Time Charter Charterer pays loading, unloading, bunkers, port charges, agency and becomes disponent owner Voyage Charter Owner pays loading, unloading, bunkers, port charges, agency
Freight market World Scale
Every year, World Scale Association (WS) publishes freight rates for voyages between various ports in the world. Freight rate basis: Vessel size: 75000 tons Fixed hire: USD 12000/day Bunker price: USD 328.75/mt (Oct06-Sep07) Bunker fuel (steaming:@55mt/day; Others:100 T/Voyage; 5 tons/each port involved)
Freight rate is for one round voyage
Standard cost ($/MT) of particular journey is given in world scale which is equivalent to WS
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