Electric Cars…Eventually, But Not Today
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Some of you may also be interested in learning how crude oil is extracted from the ground and supplied to various stakeholders such as the refineries. This animated video gives a beautiful, high level understanding of how oil is extracted from the ground and ocean beds. They are those huge pad-like things, floating in the ocean, with flames spewing out of the exhaust. I know a lot of traders and even investors investing in these asset heavy companies, without knowing the operational core of such companies.
Personally, I think this is not a great idea; one should always know what they are dealing with. Given this, and the relevance of crude oil on many listed companies, I would like to briefly discuss how the oil industry is structured.
As a crude oil trader, I do think it is extremely important to know the industry dynamics simply because the trading opportunities may not always be presented to you directly. For example there could be some fundamental change brewing in crude oil, it may not manifest into a trade forexpros commodities crude oil streaming chart crude oil directly, but instead a trade opportunity may come about in the downstream companies.
For you to benefit from this, it becomes imperative to know the layout of the industry and identify areas of opportunity. My objective here is to familiarize you with the industry layout and help you map companies and how they fit into the overall oil and gas ecosystem.
It takes many years for upstream companies to identify an forexpros commodities crude oil streaming chart potential oil well and convert it into a fully functional, profitable oil well. Upstream companies manufacture and store crude oil in barrels millions of barrels are produced everyday. Forexpros commodities crude oil streaming chart, they end up spending a lot of money read as capital expenditure to extract oil. However, the price at which they can sell this oil in the open market is not really in their control.
The price is determined by the markets in which market participants like you and I participate and influence the international oil price. Every upstream company has a breakeven point — defined as the cost of producing one barrel of oil. Naturally, these companies forexpros commodities crude oil streaming chart strive hard to keep their costs low and bring down the full cycle cost. Internationally companies such as Shell, BP, Chevron etc. The key point to forexpros commodities crude oil streaming chart here is that low oil prices do not really favor upstream companies in general, especially the ones which have high economies of scale the ones which have high full cost cycle.
Obviously, higher oil price is good for these companies as their efforts to extract oil remain the same, but margins improve drastically. We will talk about the downstream industry first, and then discuss the mid stream industry.
Generally speaking, the job of the upstream companies ends forexpros commodities crude oil streaming chart producing crude oil.
If we have to use it as petrol or diesel, then the crude oil has to be refined. This is where the downstream industry comes into the forexpros commodities crude oil streaming chart. These companies purchase the crude oil from upstream companies and refine the crude oil to various forms such as — petrol, diesel, aviation fuel, marine oil, kerosene, lubricants, waxes, asphalts, liquefied petroleum gas etc.
Companies in this sector also go the extent of distributing these products across the value chain, right from business to business B2B distribution to business to consumer B2C distribution. In fact, petrol bunks are a good example of this phenomenon. Petrol bunks are nothing but a retail outlet, retailing petroleum products and owned by downstream companies. Some companies try and integrate and operate across the value chain i. They produce close to 4 million oil barrels per day and operate around 40 oil refineries across 21 countries.
So, if the oil prices cool off, then it implies that the downstream companies can buy oil at cheaper prices from the upstream company which is not so good for upstream boys as their efforts to produce oil is still the same.
However, the benefit of lower oil price is not passed on to the end user i. Take a minute to understand weather the company is downstream or upstream company, and analyze the impact of oil prices on the company. We will quickly discuss the midstream companies before looking into other aspects. In very loose terms, midstream companies are the ones act as a courier between the upstream and downstream companies. They are responsible for the transport of oil from the oil well to the refineries.
They do this via pipelines, road transportation oil takersand by ocean shipments. Consider them as the wholesalers of crude oil. Some midstream companies try to deliver more on the value chain by refining the crude oil to some extent, hence their operations sometimes overlap with downstream companies. Since midstream companies deal with both up and downstream companies, they are kind of caught in the middle, they neither want oil forexpros commodities crude oil streaming chart to increase or decrease, but seek stability in oil prices.
If oil price decreases, then upstream companies are affected, this is not good for them. Likewise, if the prices increase downstream companies are affected, this is again not so great for them.
However, this is not true. Did you know there are many varieties of crude oil which can be extracted from the ground below? The difference comes in mainly from the geographic variation and its unique characteristics. The impact of geography is so much that the characteristics of crude oil, right from thickness, color light yellow, golden yellow, deep blackviscosity, sulfur content, volatility etc.
Given this, naturally, there are many different types of Crude oil. I know the basic difference between to West Texas Intermediate WTI and Brent Blend, which is what matters to most of the crude oil traders and hence we will stick to it. Before we get into the difference between the two, let us touch upon two distinct characteristics of crude oil, which basically define the variation of crude. API gravity less than 10 indicates that the oil is heavier than water; hence the oil will sink in water.
Sweetness — Crude oil of any form forexpros commodities crude oil streaming chart naturally contain sulfur. The lesser the content I was told sub 0. West Texas Intermediate WTI — This is considered a very superior quality of crude, hence the final refined products are also meant to be of superior quality. The API gravity is Further, the sulfur content is just 0.
Brent Blend — Much like blended scotch, crude oil can also be blended to create variants with certain properties. Apparently, the Brent blend is created by blending oil from over 15 oil wells. Brent has a sulfur content of 0. The API gravity is around Clearly, due to the variation in the characteristics, the two are traded at different prices.
Have a look at the price quote for these two variants —. Brent crude is priced higher compared to WTI. In fact, Brent crude is the benchmark for International crude oil pricing.
Supply-demand effects crude oil prices and therefore the profitability of many companies linked at various points in the oil and gas eco-system.
This makes tracking the inventory levels of crude forexpros commodities crude oil streaming chart prices important on several counts. The crude oil and US Dollar share an inverse forexpros commodities crude oil streaming chart with each other. A strengthening US Dollar tends to drive the price of crude oil down.
Likewise, weakening USD tends to drive the prices of crude oil higher. At this point it is very important to note that both these assets have forexpros commodities crude oil streaming chart own supply demand dynamics influencing their price movement; however, they are also somewhat linked to one another. Here is one for example —.
This makes absolute sense as crude oil is an international currency priced in dollars, therefore irrespective of who is buying crude oil, payments happen in US dollars. Given this, if the Dollar increases for whatever reasonsthen countries tend to purchase more oil for the same level of dollar more oil can be purchased for the same dollar forexpros commodities crude oil streaming chart. This leads to quicker depletion of inventory levels, therefore the price of oil increases.
The argument above is generally true over long time periods. However, please do remember that both these assets have their own fundamental dynamics playing. So there could be instances where both of them may break their inverse correlation and head in same direction. Also, remember the inverse correlation only suggests that the two assets move in opposite direction but does not say anything in magnitude. Very well and concise information about Crude Oil.
Eagerly waiting for next chapter on Crude Oil Trading. Sir I just read option module. Can you please explain the drop in premium of put calls.
Mukhul, I respond to queries everyday based on where it appears. Nothing else apart from Volatility and liquidity can explain this. If crude oil price increase internationally. What I want to know is that oil prices is determined internationally only or domestic angle could be their? There are several layers here — if the oil prices increase, then upstream companies can sell them at higher prices. Therefore, their margins increase. Downstream companies have to buy it higher prices…internationally this increase in price is directly passed on to end customers.
However, in India petroleum prices are regulated by the govt, hence customers are kind of insulated to these shocks…. If bpcl or hpcl increases ,ONGC should go down. But last 1 year data says both companies share price effectively gone up. Its hard to arrive at that conclusion for various reasons which includes the involvement of the government. Sir, on 30 th Nov I made a bullish opec bet on crude oil and gains good profit. Thanks for your teaching.
I have a question, suppose I am trading only in one metal or say crude oil multiple times a day or say 3 times a day, like a scalper buying- selling, buying -sellingat the end of the day will the points made be averaged out or i will get the total points? It is based on individual trade. However, it will also show up as a weighted average, which leads to the same answer anyway.
Does the crude prices on MCX really follow the Brent prices? The contract on Brent is no longer active on MCX.