Pricing

Date: 2015-10-07; view: 609.

Text 14

References to the oil prices are usually either references to the spot price of either WTI/Light Crude as traded on New York Mercantile Exchange (NYMEX) for delivery in Cushing, Oklahoma; or the price of Brent as traded on the Intercontinental Exchange (ICE, which the International Petroleum Exchange has been incorporated into) for delivery at Sullom Voe. The price of a barrel (which is 42 gallons) of oil is highly dependent on both its grade (which is determined by factors such as its specific gravity or API and its sulphur content) and location. The vast majority of oil will not be traded on an exchange but on an over-the-counter basis, typically with reference to a marker crude oil grade that is typically quoted via pricing agencies such as Argus Media Ltd and Platts. For example in Europe a particular grade of oil, say Fulmar, might be sold at a price of "Brent plus US$0.25/barrel" or as an intra-company transaction. IPE claim that 65% of traded oil is priced off their Brent benchmarks. 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 their "world oil price".

It is often claimed that OPEC sets the oil price and the true cost of a barrel of oil is around $2, which is equivalent to the cost of extraction of a barrel in the Middle East. These estimates of costs ignore the cost of finding and developing oil reserves. Furthermore the important cost as far as price is concerned, is not the price of the cheapest barrel but the cost of producing the marginal barrel. By limiting production OPEC has caused more expensive areas of production such as the North Sea to be developed before the Middle East has been exhausted. OPEC's power is also often overstated. Investing in spare capacity is expensive and the low oil price environment in the late 90s led to cutbacks in investment. This has meant during the oil price rally seen between 2003-2005, OPEC's spare capacity has not been sufficient to stabilise prices.

Oil demand is highly dependent on global macroeconomic conditions, so this is also an important determinant of price. Some economists claim that high oil prices have a large negative impact on the global growth. This means that the relationship between the oil price and global growth is not particularly stable although a high oil price is often thought of as being a late cycle phenomenon.

A recent low point was reached in January 1999, after increased oil production from Iraq coincided with the Asian financial crisis, which reduced demand. The prices then rapidly increased, more than doubling by September 2000, then fell until the end of 2001 before steadily increasing, reaching US $40 to US $50 per barrel by September 2004. In October 2004, light crude futures contracts on the NYMEX for November delivery exceeded US $53 per barrel and for December delivery exceeded US $55 per barrel. Crude oil prices surged to a record high above $60 a barrel in June 2005, sustaining a rally built on strong demand for gasoline and diesel and on concerns about refiners' ability to keep up. This trend continued into early August 2005, as NYMEX crude oil futures contracts surged past the $65 mark as consumers kept up the demand for gasoline despite its high price.

Individuals can now trade crude oil through online trading sites margin account or their banks through structured products indexed on the Commodities markets.