The Fate of the World’s Most Actively Traded Commodity – Crude Oil
Ever since people developed efficient means of refining petroleum into a range of different petro-products in the middle of the nineteenth century, crude oil has been a vital factor in development and welfare of our society. Nowadays, roughly eighty five million barrels of crude oil are consumed daily. Even though this number might seem like an astronomical figure at first glance, it goes a long way to describe just how imperative this fossil fuel has become.
Refined crude oil is not solely the fuel that keeps world’s economies on track; it has evolved into a powerful political instrument used effectively by the producers and consumers of the non-renewable resource alike to achieve their political objectives. In 1973 OPEC announced an oil embargo against the United States, and other countries that supported Israel during the Yom Kippur War, to apply pressure on the affected countries in an attempt to force them to modify their Middle East policy, just like European Union has recently banned all imports of the Iranian oil in order to press Tehran into concessions on its nuclear program. Because the situation around Iran’s atomic ambitions has been intensifying as of late, people around the world grow increasingly concerned with the impact that interrupted or completely ceased supply of oil from the third largest exporter of petroleum could have on the global economy. This quandary makes one ponder upon the future of the crude market and the sustainability of the developed countries’ reliance on the foreign oil to fulfill their energy needs.
In order to understand the extent of the world’s dependence on oil, it is imperative to keep in mind the basics of the crude petroleum industry and the role this energy commodity plays in the price formulation of other goods and services. At the moment, three benchmarks determine the price of the large portion of internationally traded crude. ETRM systems around the world are swamped with market data pertaining to the prices of Brent, Dubai and WTI markers of oil. These three blends of crude, all of which were introduced in 1980s, have much in common. All three are produced in high volumes, are drilled in locations close to the major refining centers, exhibit no monopoly of production, and have very high liquidity on the market. Each benchmark has a different price determination methodology that takes into account financial instruments along with the quotations of the raw crude.
The “financialization” of the crude market was brought upon by the rise in volatility on the oil markets during the 1970s. International Petroleum Exchange (IPE) was founded in 1980, and the launch of the futures contracts with varying contract granularities followed in the coming years. Many other contracts, such as Contract For Difference (CFD) and Exchange for Physical (EFP) were introduced later to made blends, such as Brent, more sophisticated and attractive from the traders’ point of view. This so-called “financialization” of the crude market began a new chapter in the history of the oil price formation, representing a shift from a system where prices were administered by the large oil multinationals, and intergovernmental organizations with monopolistic ambitions.
The new chapter, as promising and well structured as it seems, oftentimes encounters obstacles that cannot be fixed through addition of another layer of financial instruments. While the proven oil reserves controlled by the Western friendly nations slowly dry out, United States and European Union will likely have to increase their dependence on crude exports from countries like Iran and Venezuela in an attempt to quench their expanding economies’ thirst for oil. Fall in the supply of crude is bound to elevate the food prices; the correlation between the shifts in prices of the two commodities have been documented in far too many studies as of late for politicians to ignore the importance of the steady crude supply. The news about Venezuela surpassing Saudi Arabia in the oil reserves category further complicated the situation, as Venezuela and Iran now combined control one third of the world’s proven oil reserves.
While the significance of WTI and Brent benchmarks continues to dwindle, due to diminishing volumes of production, it is becoming all the more vital that companies operating in the commodity trading spheres have access to the data management systems that will enable them to make the most informed decisions and adopt to the ever volatile oil market. As new blends of crude strengthen their market credibility and emerge as favorites to replace the current benchmarks, market data collection and analysis features of ZEMA make it an unparalleled tool that can aid in making any organization involved in crude trading a frontrunner in the vast field of competitors. While it is certain that crude oil will remain one of the key natural resources for many years to come, it is not clear how the energy commodities markets will fare in the near future. Hence, it is essential that those who would like to get ahead of the pack, or remain there, use only the best data collection and analysis tools available on the market.