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Marketing to Oil Trading Leaders

Understanding Their Role

Oil is the largest fuel source in the world today.1 Changes in oil prices can significantly influence the global economy. Oil pricing is immensely important, complex, and goes far beyond the basic buying and selling of physical oil. Companies from a variety of industries must understand and prepare for changes in oil prices. Consider, as examples, the impact of oil price fluctuation on airfare, supply chain costs, demand for fuel-efficient cars, or even the distance consumers are willing to travel to retail stores.

 

At its most basic level, physical barrels of crude oil are purchased at a “spot” price, where the seller agrees to deliver to a certain location as soon as possible.2 Since not all crude oil has the same composition, prices vary based on the area where the oil was produced. Crude can be graded as light or heavy, and low or high in sulfur (called sweet or sour respectively,) effecting how easy or difficult it is to refine into valuable products.3 There are hundreds of grades of crude and refined products available. The most prominent crudes include Brent, West Texas Intermediate (WTI) and Dubai.4

 

In addition to physical trading, there are many “paper” trading instruments available on worldwide exchanges involving the right to buy certain quantities of oil at certain dates. “Options” contracts give the purchaser an opportunity to buy or sell at stated price for a certain period, while “Futures” contracts are obligations to buy at a stated price at some future date. These paper trades do not necessarily involve a physical transfer of oil. They can simply be financial tools either for hedging against unexpected moves in prices, or for speculation.5

 

“…the price of crude oil is the most significant factor determining the prices of petroleum products. Consequently, the price of gasoline is largely determined by the worldwide demand for and supply of crude oil.” - API6

1 International Energy Agency (IEA). “Key World Energy Statistics.” 2014. Available at: www.iea.org/publications/freepublications/publicat...

2 Hilyard, Joseph. The Oil and Gas Industry: A Nontechnical Guide . Chapter 14. Edited by Hill, Stephen. 1421 South Sheridan Road, Tulsa, Oklahoma 74112-6600: PennWell Corporation, 2012.

3 Boom-Times for US Refiners.” Petroleum Economist.

4 See examples at the US Energy Information Administration’s site: www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm

5 Hilyard, Joseph. The Oil and Gas Industry….”

6 American Petroleum Institute (API). “"Understanding Crude Oil and Product Markets." 2014. Available at: www.americanpetroleuminstitute.com/oil-and-natural...

 

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Oil prices have a significant impact on most of sectors of the economy. Oil trading is complex and wide-ranging, and includes both the actual physical transfer of oil and purely “paper” trades.