According to the International Crude Oil Market Handbook, published by the Energy Intelligence Group, there are about 161 different internationally traded crude oils. They vary in terms of characteristics, quality and market penetration.
Crude oils vary in price because they vary in quality. But the two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil are West Texas Intermediate (light sweet crude) and Brent.
1.
Differences
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The “quality” of crude oil depends primarily on its sulfur content and API gravity. The American Petroleum Institute created the API gravity measurement--the weight of oil compared to water. The “lighter” the crude, the higher its market value because it can be used for more processes.
Light Sweet Crude
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West Texas Intermediate (WTI) is considered a light sweet crude oil of very high quality and is excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees (making it a “light” crude oil), and it contains only about 0.24 percent sulfur (making it a “sweet” crude oil). Early oil prospectors coined the term “sweet” because the low sulfur allowed the oil to pass their taste test.
Brent Crude
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Brent is actually a blend of crude oils from 15 different oil fields in the Brent and Ninian systems located in the North Sea. Its API gravity is 38.3 degrees (making it a “light” crude oil, but not quite as “light” as WTI), while it contains about 0.37 percent sulfur (making it a “sweet” crude oil, but again slightly less “sweet” than WTI). The Brent blend is ideal for making gasoline and middle distillates, both of which are consumed in large quantities in Northwest Europe, where Brent crude is typically refined.
Crude Pricing
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Generally, differences in the prices of these crude oils are directly related to the quality differences--the lighter the crude, the higher the price. But other factors can also influence the price relationships between crudes. Crude oil prices behave much as prices do with other commodities, with wide price swings in times of shortage or oversupply, war or peace and with fluctuations in supply and demand among developing nations in Asia.
Playing the Market
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The NYMEX futures price for crude oil, which is reported in almost every major newspaper in the United States, represents (on a per-barrel basis) the market-determined value of a futures contract to either buy or sell 1,000 barrels of crude oil at a specified time. Brent blend is generally priced at about a $4 per barrel premium compared to the OPEC Basket price and about a $1 to $2 per barrel lower than WTI.
Crude oils vary in price because they vary in quality. But the two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil are West Texas Intermediate (light sweet crude) and Brent.
1.
Differences
*
The “quality” of crude oil depends primarily on its sulfur content and API gravity. The American Petroleum Institute created the API gravity measurement--the weight of oil compared to water. The “lighter” the crude, the higher its market value because it can be used for more processes.
Light Sweet Crude
*
West Texas Intermediate (WTI) is considered a light sweet crude oil of very high quality and is excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees (making it a “light” crude oil), and it contains only about 0.24 percent sulfur (making it a “sweet” crude oil). Early oil prospectors coined the term “sweet” because the low sulfur allowed the oil to pass their taste test.
Brent Crude
*
Brent is actually a blend of crude oils from 15 different oil fields in the Brent and Ninian systems located in the North Sea. Its API gravity is 38.3 degrees (making it a “light” crude oil, but not quite as “light” as WTI), while it contains about 0.37 percent sulfur (making it a “sweet” crude oil, but again slightly less “sweet” than WTI). The Brent blend is ideal for making gasoline and middle distillates, both of which are consumed in large quantities in Northwest Europe, where Brent crude is typically refined.
Crude Pricing
*
Generally, differences in the prices of these crude oils are directly related to the quality differences--the lighter the crude, the higher the price. But other factors can also influence the price relationships between crudes. Crude oil prices behave much as prices do with other commodities, with wide price swings in times of shortage or oversupply, war or peace and with fluctuations in supply and demand among developing nations in Asia.
Playing the Market
*
The NYMEX futures price for crude oil, which is reported in almost every major newspaper in the United States, represents (on a per-barrel basis) the market-determined value of a futures contract to either buy or sell 1,000 barrels of crude oil at a specified time. Brent blend is generally priced at about a $4 per barrel premium compared to the OPEC Basket price and about a $1 to $2 per barrel lower than WTI.
How to Trade Crude Oil
Trading crude oil involves owning it. While you could purchase an oil well, it isn't practical for the sake of trading. Fortunately, oil is a commodity. That is, a real asset that can be traded through exchange houses through futures contracts, exchange traded notes, royalty trusts, and oil and gas exploration companies. The most direct way to trade crude oil is through futures and Exchange Traded Funds (ETF's).
- Difficulty:
- Moderate
Instructions
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- 1 Review the definition of a crude oil futures option. This refers to the right, but not the obligation to sell (put) or buy (call) 1000 barrels of crude oil for a certain future strike price. This future strike price is called the expiration date. Brent Crude Oil Futures (BZQX) and the Light Sweet Crude Oil (CLQX) are two examples of futures.
- 2 Find the symbol for a crude oil Exchange Traded Fund (ETF). These funds trade just like regular stock and are designed to mimic the exact price movement of crude oil as a separate futures contract. The symbol for the crude oil ETF is USO.
- 3 Determine the details of your purchase. Now that you have the ticker symbols for crude oil futures and ETF's, you can make a purchase. How much do you want to wager? There are two major differences between ETF's and Futures. While ETF's may be less riskier and require a smaller initial starting price the leverage required (50% deposit) does not provide as much flexibility compared to crude oil futures contracts which only require a 5% deposit. With an ETF you would need to deposit $50,000 for a $100,000 crude oil contract, but only $5,000 for the futures requirement. Futures contracts are also traded 24 hours a day, unlike ETF's which trade like stocks.
- 4 Consult with your broker. If speaking to a live person or over the phone, you will want to provide the symbols discussed in Steps 1 and 2 (BZQX, CLQX and USO). Also be sure to ask for margin or deposit requirements on each. You can also do your own research by looking these symbols up on Yahoo! or Google Finance.
- 5 Purchase shares or contracts. Once you feel comfortable about the differences between trading futures contracts versus ETF's, make a purchase either online or through your brokerage. One reputable online brokerage is Etrade.
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