Oil Market Fundamentals


This session will give you all the basics you need to know about oil markets: producers, consumers, the refining process. The next module will provide you with an overview of the main types of oil traded in the OTC markets and the associated derivative products.

Crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons. Petroleum is used mostly for fuel oil and gasoline through the refining process. Generally crude oil is classified as a function of 3 factors:

  1. Its origin, the most 2 known sources being West Texas Intermediate (WTI) or Brent. Its location is important because it dictates the transportation costs to the nearest refinery
  2. Its API, a measure of gravity. This is important because a light crude produces a higher yield of more valuable gasoline then a heavy crude; and
  3. Its sulphur content. A sweet crude (low sulphur content) is more desirable than a sour crude (high sulphur content) as it commands a higher price due to the lower refining costs incurred to meet environmental standards in consuming countries.

I outline the main pricing references for crude as well as an idea of their “liquidity” in the derivatives markets:

  • West Texas Intermediate (WTI) is a light, sweet crude oil delivered in Cushing, Oklahoma. Main benchmark for North American oil and the most liquid index worldwide
  • Brent is a blend of different oils in the North Sea. The oil is delivered at Sullom Voe in the Shetlands, UK. Oil production from Europe, Africa and Middle East is priced off this benchmark, which is the second most liquid worldwide after WTI
  • Others such as Dubai-Oman, Tapis, Minas and the OPEC Reference Basket. The latter is a weighted average of oil blends from various OPEC countries (Organization of Petroleum Exporting Counties). Liquidity in the derivatives markets is generally limited to none (some trades are sometimes done on an ad-hoc basis).

Oil is distilled into fuels – the most common types (and their associated European derivatives indices) are:

  • Diesel, mostly traded as Platts ULSD Diesel 10ppm CIF North West Europe (NWE) or CIF Mediterranean
  • Fuel oil, mostly traded as Platts 1% or 3.5% sulphur content fuel oil. This can be either CIF North West Europe of MED, either on cargo ships or barges
  • Gasoline, generally Argus CIF NWE Unleaded Gasoline
  • Jet fuel, generally Platts Jet fuel CIF NWE. In Asia this is referred to as Jet Kerosene and trades as Platts Jet Kerosene


The top 5 oil consuming countries are:

  1. USA, 19.5m bbl/day
  2. China, 7.8m bbl/day
  3. Japan, 4.8m bbl/day
  4. India, 2.9m bbl/day
  5. Russia, 2.9m bbl/day

As a whole, the world as a whole consumes approx. 63m bbl/day of oil.


The top 5 oil producing countries are:

  1. Saudi Arabia, 10.6m bbl/day
  2. Russia, 6.7m bbl/day
  3. United States, 8.3m bbl/day
  4. Iran, 4.2m bbl/day
  5. China, 3.9m bbl/day


Source by Agustin Valecillos