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Crude oil is a naturally occurring fossil fuel that is found in certain rock formations in the earth. It is a mixture of hydrocarbons that is refined into petroleum products, such as gasoline, kerosene, gas oil and fuel oil.
Due to the wide variety of crude oil types, they are priced and traded relative to well-known benchmarks. Both the Brent and WTI classifications are considered light, sweet crude low in sulphur content and density , containing a higher percentage of light products, like gasoline fuel or kerosene, and requiring less refinement before going to market. Crude oil prices are influenced by a complex interaction of underlying supply and demand factors, geopolitical events and increasingly more developed spot and futures trading.
Between and global production of crude oil increased 15 per cent 1 with the largest regional increase in output coming from the Middle East including large producing OPEC nations , which has seen supply grow 29 per cent 1. In the three largest producers of oil were Saudi Arabia, Russia and the United States see figure 1. Between and US supply decreased 44 per cent 1 , however this trend was reversed in as output from shale oil also referred to as light tight oil and other technological developments helped increase US production by 23 per cent 1 between and Over the last decade global oil consumption has increased 14 per cent 1 , with the largest regional increases occurring in the Middle East and Asia Pacific.
In the largest consuming countries were the United States and China see figure 2. Demand in China surged 94 per cent 1 between and , in stark contrast to falling US consumption. Economic development in Asia can be expected to drive consumption amongst non-OPEC nations, with the largest absolute growth in demand emanating from China and India between and 2. Consumption amongst OPEC nations in the Middle East is also expected to grow on the back of growing populations, rising wages and increased industrial output.
Oil is currently the most widely traded commodity in the world. The largest importers of oil in were the US, Europe and Japan see figure 3. US imports of oil have been in decline since and this trend could continue with rising domestic production and decreasing demand due to increases in vehicle fuel economy. Japan is heavily dependent on trade, with imports making up It is forecast that continued technological developments and increasing output in the US could reduce its requirement for imports and see it become a more prominent player in the export market.
Exports from the Middle East and Russia, currently the two largest exporters of crude see figure 4 , can also be expected to continue to service the rising demand for oil in Asia. OPEC is an intergovernmental organisation of twelve oil-exporting developing nations that coordinates and unifies petroleum policies in an attempt to manage production.
At present, around 40 per cent of the world's oil supply and 60 per cent of global petroleum trade comes from OPEC member countries 3. Additionally, geopolitical instability in certain OPEC countries can lead to a short term tightening of supply, often resulting in a spike in oil prices.
Strong growth from shale oil and oil sand productions in North America have supported global oil supply since and have helped offset output declines in the North Sea fields. Outside the US, the development of shale oil is still at an early stage, however there are indications that point to large amounts of technically recoverable resources distributed globally. Oil is traded on a global market and price differences between US crude and internationally traded benchmarks have been limited until recently.
Traditionally WTI and Brent have traded at near parity however over the past two years this spread has both widened and narrowed at different points see figure 6 below. Recent fluctuations in the WTI-Brent spread have been influenced, in part, by two key factors — structural changes with increasing output in North America and geopolitical instability across the Middle East. Unlike some other commodities, producers of oil can use inventories, in addition to new output, to satisfy demand.
For example, inventories can be used by producers to make up for unexpected shortfalls in supply during geopolitical crises. As a component of supply, inventory levels are often a good indicator of market pressures on the price of oil.
One way for investors to gain exposure to oil is by investing in publically listed companies involved in oil exploration, production and trading. A significant variety of oil equities are frequently bought and sold, with the equity market populated by large market capitalisation oil companies including ExxonMobil, Royal Dutch Shell and BP. The contract size for both is barrels and they are priced in US dollars and cents per barrel.
Trading hours are between 9: This ensures that continuous exposure to the commodity is maintained. The contracts being purchased may be more expensive than the contracts being sold an upward sloping futures curve which would have a negative impact on investment returns. Alternatively the contracts being purchased may be cheaper than the ones being sold a downward sloping futures curve which would have a positive impact on investment returns. For more details please refer to our ETPedia by clicking here.
A variety of Crude Oil ETPs track indices that are constructed to simulate a continuous exposure to crude oil futures returns. The crude oil spot price is non-investable as it would entail physically holding the commodity. Therefore it is important that investors recognise that when they invest in an ETP or any other financial instrument tracking indices that provide continuous exposure to crude oil futures returns, the returns will include the benefit if the curve is in backwardation or cost if the curve is in contango of rolling futures to maintain exposure to crude oil futures returns.
At times the total returns from investing in commodity futures can therefore be very different from the theoretical returns reflected in the spot or front-month futures price as provided below. There is a wide variety of ETPs providing investors with the ability to simulate a continuous exposure to crude oil futures returns.
Through ETPs, investors are able to access exposure to front month as well as longer-dated WTI and Brent futures returns and indices that adjust exposure based on pricing and fundamental factors. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
Oil and energy ETPs. Active and passive investment What is an ETP? Why use an ETP? Internal costs External costs Beyond TER Tracking Tracking error and tracking difference Causes of tracking error and difference Importance of tracking error and difference Understanding indices Futures, contango and backwardation Futures Understanding futures indices Impact of contango and backwardation. The performance of active investment funds The cost of active funds The risks of passive investment.
Global Crude Oil Supply, Source: Global Crude Oil Demand, Source: Telephone calls may be recorded for training and monitoring purposes. Get started in 3 quick steps. Please select a region Americas Asia Pacific Europe. Please select a country. Please select an investor type. Please Accept the Terms and Conditions to continue. Yes, continue to website. Your login was unsuccessful. Email address Email address is required Email address must be valid Password Minimum password length is 6 characters Remember my details.
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