For those of you new to trading oil, whether trading in spot oil contracts or futures oil on an oil trading exchange, I hope that the preceding pages have at least given you a basic understanding of the global market, and perhaps more importantly how different the crude oil trading market is to any other. As we have seen when looking at the supply and demand characteristics, there are very few markets which behave in the same way as oil. The oil market is complicated further by the fact that when we use the generic term “oil”, we are not necessarily referring to the same product. For newcomers to the market this can be confusing as you will hear terms such as light sweet, sour, heavy and blends, so when we start oil futures trading, we need to understand exactly the underlying asset we are trading ( and not just the term “oil”). I hope the following will provide an introduction to some of the types and terms you will come across when trading in oil, and I have also included some ” rule of thumb” conversions which may help you when researching the oil market. So let’s start with some of the basics.

The trading oil market classifies crude oil in three different ways which may seem strange, but does make sense once you begin to think about them, and these are as follows :

• Geographic location
• Gravity ( or API)
• Sulphur content

If we consider the first of these which is the geographic location, this is important as it affects the distance that the oil has to travel ( and therefore the cost) before the crude oil product can be refined. The second classification is the gravity of the crude oil, as defined by the American Petrochemical Institute or API for short.  The third and final classification is that of the sulphur content which in turn affects the costs and complexity of refining. Let’s look at each of these classifications in turn and the types of standards and products which are used in oil trading.

The three principle geographic locations are Brent ( UK), West Texas ( US ), and Oman ( Middle East). Of these three, the global standard benchmark for trading crude oil is known as Brent Blend, a blend of twenty crude oils which is brought ashore at the Sullom Voe oil terminal in the Shetlands. Brent blend provides the benchmark for oil commodities flowing from East to West from Europe, Africa and the Middle East. The West Texas Intermediate ( WTI ) is delivered at Cushing in Oklahoma, and provides the benchmark standard for US markets. Finally the Oman-Dubai benchmark is used for oil flowing to the Asia-Pacific region. These are the three most important geographic standards for oil trading and are universally recognised across all markets. There are of ourse many others which you will come across such as Forties blend from the North Sea, Oseberg and Ekofisk from the Norwegian sector, Tapis and Minas which are used a benchmarks in the Far East and of course the OPEC reference basket which we discussed earlier.

The second classification of crude oil is it’s gravity, as defined by the American Petrochemical Institute. The reason it is so important is that the lighter the density then the higher the yield of gasoline which can be refined, thus making it a more profitable and desirable commodity. The classification generally falls into one of four as follows :

Very light – Above 44 on the API scale – Arun from Indonesia is an example with and API of 54

Light – 34-44 on the API scale – As an example Brent (UK) is 38 and WTI ( US) is 38 – 40

Medium – 23-34 on the API scale – An example here would be Kuwait which is 31

Heavy – Below 23 on the API scale – An example here would be Maya from Mexico which is 22

The final main classification is that of sulphur content. In simple terms the higher the sulphur content then the more complex and higher the cost of refining in order to achieve the required environmental standards for sulphur extraction. Sulphur content is classified as “sweet” ( low sulphur) to “sour” ( high sulphur) – of which sweet naturally have a higher value. These are generally classified as low, medium and high as follows :

Low – up to 0.5% content – an example would be Brent which has 0.45% by weight and WTI with 0.39%

Medium – 0.5% to1.5% – an example here would be Oman at 0.94%

High – above 1.5% – an example here would be Dubai at 1.68%
Trading Oil – Refined Products

Once the crude oil has been extracted it is of course refined into a variety of main, and speciality products. The major products are gasoline, LPG, Kerosene/jet fuel, gas/diesel oil and fuel oil. Specialty products include naphtha, lube oil, waxes, bitumen and coke. The major products are burnt in one way or another to release their energy, whilst the specialty products are not, and are used in other ways. Typical distillation yields for Brent would be 41% fuel oil, 23% naphtha, 22% gas oil, 12% kerosene and 2% fuel and loss.

Finally I promised to give you some rules of thumb which I hope will be of help in your oil trading. These ( in no particular order ) are as follows :

The volume of one barrel of oil is approximately 42 US gallons

To convert from barrels to tonnes, divide by 7.5

A standard shipload cargo is 600,ooo barrels approx.

A Suezmax cargo is 1,000,000 barrels approx.

VLCC ( very large crude carrier)  is roughly 2,000,000 barrels

Now that we’ve covered some of the details of crude oil, the markets and the product, lets now look in detail at the way oil is traded in the markets, and the financial oil trading contracts available to us as oil traders for trading in oil.

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