Oil Trading, Oil Trade, Oil Trader, Oil Broker, Oil Contracts

Oil trading occurs through several contract arrangements and spot transactions in the international oil markets. Oil futures contracts also play a significant role in determining the international oil prices.

How Are Oil Prices Determined?

The demand and supply cycle drives oil prices in the international economy. Since there are so many varieties of oil in the market, it is essential to consider a benchmark quality, called the marker crude. In the London-based oil market, Brent Crudeis used as the benchmark quality against which the price of other oil varieties are determined. Brent Crude determines the prices of almost two-third of the world’s oil trade. Gulf countries refer to Dubai Crude as marker quality. Dubai Crude is available in spot transactions rather than long-term supply contracts. The US refers to West Texas Intermediate or ‘sweet crude’ to determine oil prices. Owing to its high quality, West Texas Intermediate is the highest priced crude.

All the oil trading markets consider the US dollar as the trading currency. Thus, the role of the US gets highlighted in regulating oil commerce.

The Organization of Petroleum-Exporting Countries (OPEC) has developed the OPEC Basket Price index. This is an average of the oil prices in OPEC nations, including Algeria, Angola, Ecuador, Indonesia, Iran, Libya and Saudi Arabia. Member nations tend to regulate oil production to keep the oil prices within the desired range. The OPEC Basket Price is the lowest priced crude due to high sulfur content, which is removed while refining.

Oil Trading: Futures Contracts

The two major trading exchanges for the oil sector are the New York Mercantile Exchange in the US and the Intercontinental Exchange in London, UK. In 2008, the Iranian Oil Bourse emerged as another international oil exchange center. These international exchanges act as the hub to buy oil futures and options. Changes in the trading prices at these centers affect global oil prices and the international economy.

Futures contracts also play a dominant role in international oil commerce. Oil futures involve an agreement wherein the buyer promises to buy a particular quantity of oil and the seller offers to deliver the oil at a fixed price on a specific future date. Like other commodity futures, oil futures contracts provide the opportunity to mitigate risk factors associated with the global oil economy. It acts a protective tool for producers and distributors against unpredictable losses in the oil industry.