Investment in Crude Oil

Basic things to remember about crude oil.

Crude oil is the most widely used energy source with high price volatility and most actively traded in commodity market. Its futures contracts are traded in largest volume worldwide. Crude oil price increment can evolve inflationary effects due to increment in raw material and other input costs.

Crude Oil Grading

How Crude Oil is classified ?

Types of Crude Oil available in Market ?

Brent Crude is North Sea grade and a benchmark for Crude oil from Europe and Africa.

Middle East Crude oil has market in Gulf countries. And it is valued by the arithmetic crude oil average of Oman and Dubai.

Crude Oil traded in US Markets is called WTI (West Texas Intermediate) and it has more quality comparing to Brent Oil.

One important factor that determines crude oil quality is inclusion percentage of sulphur. The lesser the sulphur is contained in crude oil the more ‘sweet’ (<0.5% sulphur) it considers, at the same time if the oil contains more sulphur, it is considered as ‘sour’ (>0.5%). ‘Sweet’ oil is comparatively easy to be purified and having more price.

The lighter the oil is the easier to be purified. So such grade has more value than heavier one.

Both WTI and Brent Oil are lighter and sweeter.

Risk of Volatility

Volatility of Crude is an important factor to be considered.

It is difficult to know speed of price changes of crude oil although direction is expected.  Crude oil futures market has high volatility.

During the global financial crisis of 2007–2008, the price of oil went to the record high of US$147.27 in July 2008 second week. On 23^rd December 2008, at the beginning of financial crisis of 2007–2010 WTI crude oil spot price fell to the lowest price of US$30.28/barrel.

There is a mutual relationship between economic growth and energy demand. Energy demand extends it to crude oil demand since Industrial-system has to use cheaply available energy like Crude oil in large extent. Global economic dynamic data forecasts crude oil demand and possible price changes with other related factors as follows.

Crude Price Related Factors

The Organisation of Petroleum Exporting Countries (OPEC), decision to increase or decrease its production and supply to meet demands of consumer countries.

Crude inventories related data announcement affects crude oil price.

Seasonal weather induces or demotes consumption level of heating oil and gasoline, changing its demand in market.

Price goes up when oil demand increases. It increases cost of living. To control the same government forces citizens to reduce oil consumption. It effects in price declining. USA, China, India and Japan are largest consumers of crude oil.

Oil futures contracts speculative trading in open market affects its price.

Extreme weather conditions resist production and supply infrastructures increasing price.

When dollar value strengthens, consumer countries income reduces decreasing Oil consumption/demand and its price.

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