Crude oil comes in many varieties and qualities, depending on its
specific gravity and sulphur content which depend on where it has been pumped
from. Because there are so many different varieties and grades of crude oil,
buyers and sellers have found it easier to refer to a limited number of reference,
or benchmark, crude oils. Other varieties are then priced around this,
according to their quality. Brent is generally accepted to be the world
benchmark, although sales volumes of Brent itself are far below those of Saudi
Arabian crude oils. Brent is used to price 66% of the world's internationally
traded crude oil supplies. In the Gulf, Dubai crude is used as a benchmark to
price sales of other regional crudes into Asia. In the United States, the
benchmark is West Texas Intermediate (WTI).
This means that crude oil sales into the US are usually priced in
relation to WTI. However, crude prices on the New York Mercantile Exchange
(Nymex) generally refer to ‘light, sweet crude.’ This may be any of a number of
US domestic or foreign crudes but all will have a specific gravity and sulphur
content within a certain range. Slightly confusingly, the Organisation of
Petroleum Exporting Countries (OPEC) ‐ a cartel of some of the world's
leading producers ‐ has its own reference. Known as the OPEC basket
price, this is an average of seven ‐ always the same seven ‐
crudes. Six of these are produced by OPEC members while the seventh, Isthmus,
is from Mexico. OPEC aims to control the amount of oil it pumps into the
marketplace to keep the basket price within a predetermined range. In practice,
the price differences between Brent, WTI and the OPEC basket are not large.
Crude prices also correlate closely with each other. Due to the nature of oil
requiring extracting and refining participants commonly use futures contracts
for delivery in the following month. In this type of transaction, the buyer
agrees to take delivery and the seller agrees to provide a fixed amount of oil
at a pre‐arranged price at a specified location.
Futures contracts are traded on regulated exchanges and are
settled (paid) daily, based on their current value in the marketplace. Oil
price crisis Although many experts continue to cite fundamentals are causing
the price of oil to peak, this is no way explains the sudden hike in Oil
prices, China and India’s demand for oil has been known since the early 1990’s
as well as the worlds continuing appetite for oil, this in no way explains the
sudden hike in prices. The price of oil has been on an upward trend since the
beginning of the 21st century and the driving engine for this has been
speculation. With all the economies that have adopted Capitalism the financial
sector is the driving engine which generates wealth. However wealth is not
generated by producing real goods, goods which are made in factories, people
are employed and then paid a wage.
Most of the wealth generated in Capitalist nations is from the
financial sector that doesn’t actually produce anything but provide a service
where one can bet on the future price of items. Capitalism was named after its
most prominent aspect – Capital, the accumulation of capital and making money
out of money is a lethal cocktail when greed and consumption are added – all
these are the basic aims Capitalism attempts to achieve. In this endeavour
Capitalism promotes the securitisation (trading) of any commodity whether it is
real or imagined. Originally the stock market was created to bet on the future
movement of share prices as well as the performance of a company. Thereafter
the derivatives market was created which is a casino where betting takes place
on the movement of the stock market and in the last two decades all commodities
can be speculated upon. On March 30th 1983 Nymex introduced futures in
petroleum. That meant oil prices being fixed daily, determined by the give‐and‐take
of Nymex traders, with buyers and sellers monitoring their computer screens
worldwide. A futures contract is a promise to deliver a given quantity of a
standardised commodity at a specified place and time in the future. It is a
derivative, not the real thing. There are thousands of oil transactions daily,
but few of these shipments are delivered. Instead, they are constantly re‐traded,
based on the market price of the moment.
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