Oil Pricing

Hello and welcome back. Today we will talk about oil price and how it is
formed.
Oil price is the catchword of the day. It is everywhere TV, radio, papers.
Yet, it can be deceitful as there is no such thing as a universal oil price. Like the
price of any other commodity, oil price is dynamic; it changes according to the major
law of economics the law of supply and demand. At the same time, it will be
different depending on oil quality, place of origin and distribution area.
There exist various oil grades, different in quality and composition. These
grades mostly depend on where this oil was produced. The major quality properties
of oil are density and sulfur content. Experts distinguish between light, medium and
heavy grades. Typically, light grades are considered more valuable as they are a
better raw material for manufacturing light petroleum products such as gasoline.
Each grade has its own name, sometimes rather poetic. Thus, there exist Dubai Crude
obviously, produced in the United Arab Emirates; Brent, produced in the Northern
Sea by the British, and a Venezuela-produced grade with the beautiful name Santa
Barbara.
This abundance of various grades makes it harder to analyze the markets. To
make this task easier, experts selected several grades that serve as reference when it
comes to price analysis. These are called benchmark or marker grades.
The primary global benchmark grades today are West Texas Intermediate
(WTI) produced in the United States, and Brent produced on the North Sea. Russian
oil is traded as Urals grade. It is not a benchmark, and its price depends on the Brent
price. Urals is usually traded at a discount to Brent, as Russian oil is considered to
be of inferior quality due to higher density and sulfur content.
In the early days of petroleum industry, oil monopolies set their own prices.
Thus, is the USA oil prices were first set by Standard Oil, and then by the Texas
Railroad Commission.
At the next stage of industry development, the prices were set by the so called
Seven Sisters seven major oil companies that dominated global petroleum

industry. Five of them were American: Exxon, Mobil, Gulf, Texaco, and SOCAL
(Standard Oil Company of California), and two European: British Petroleum and
Royal Dutch, commonly known as Shell. In 1928, they formed the International
Petroleum Cartel that controlled 85 to 90% of global oil market.
Since the 1970s, power over oil prices was taken by OPEC (Organization of
Petroleum Exporting Countries), though not for long, as starting from 1983, futures
contracts for crude oil were introduced at New York Mercantile Exchange. When
they were first applied to petroleum industry, futures contracts were frowned upon
and opposed by many, but soon enough they became a common practice. Futures
contracts are attractive for both the seller and the buyer as both of them, upon
entering into the contract, hedge themselves against significant price changes.
Did you know:
Before 1970, global oil price was below dollar 3 per barrel. After the Arab
oil embargo of 1973, the price jumped fourfold up to dollar 12 per barrel.
During the Iran-Iraq crisis of 1981, oil price increased from dollar 14 to
dollar 35 per barrel.
Sweet oil costs more than the sour one. Sweet oil has low sulfur content
and does not require extra processing expenses; it earned this nickname in late XIX
century when oilmen used to taste oil in order to determine its quality.
What drives oil prices today?
There are multiple issues, the fundamental one being supply-demand ratio.
Other drivers are growth of the global economy, geopolitical risks, national oil
stockpiles, currency exchange rates, investment volumes, production expansibility,
OPEC resolutions and even weather conditions in oil production areas.
Thats all for today. I hope you found it interesting. See you in our next video.