What is a commodity?
A commodity is a food, metal orother fixed physical substance that inves-tors buy or sell, usually through futurescontracts. Agricultural products, metals,petroleum, foreign currencies, and finan-cial instruments such as Treasury billsand bonds are commodities. Petroleum(crude oil) is the world’s most activelytraded commodity.
What are spot and futures markets?
A spot market is one in whichcommodities are traded for near-termdelivery—within a month for oil markets. A futures market is one in which a com-modity is traded for delivery on a speci-fied future date, which could be monthsor years away. Major fuel users, such asairlines and trucking companies, oftenbuy oil in futures markets to guaranteethe cost of the fuel they will use.
What are the benchmark crude oils?
Grades of crude oil are determinedby their specific gravity and sulphurcontent. There are so many differentvarieties and grades of crude oil that buy-ers and sellers refer to a limited number,which are called reference or benchmarkcrude oils. Other varieties are thenpriced at a discount or premium relativeto the benchmark. Brent blend crude oilpumped from the North Sea is generallyaccepted to be the world benchmark. According to the International Petro-leum Exchange, Brent is used to pricetwo-thirds of the world’s internationallytraded crude oil supplies. In the PersianGulf, Dubai crude is used as a bench-mark to price sales of other regional
What is the difference between nominal andreal prices?
Nominal ice, omeime calle cuen olla ice,meaue he olla value o a ouc a he ime i waouce. real ice ae ajue o geneal ice levelchange ove ime, i.e., infaion o efaion. thee aju-men give u a icue o ice o vaiou yea a i hevalue o he olla wee conan.
Were nominal prices for oil higher in 2006 thanin any other time during the period 1973-2006?
Ye. the blue line on he gah inicae ha he icee bael in cuen olla, i.e., he nominal ice, waaoximaely $60 e bael in 2006.
Were real prices for oil higher in 2006 than inany other time during the period 1973-2006?
No. the gey line on he gah inicae ha he eal ice,i.e., he ice ajue o infaion, wa highe in 1981, amoe han $39 olla e bael.
Second Quarter 2007
(pecen change a an annual ae fom he eceding eiod.)
Q3-’06 Q4-’06 Q1-’07 Q2-’07Growth rate —Real Gross Domestic Product 1.1% 2.1% 0.6% 4.0%*Infation rate —Consumer Price Index 3.1% –2.1% 3.8% 6.0%Civilian Unemployment Rate 4.7% 4.5% 4.5% 4.5%
crude oils to Asia. In the United States,the benchmark is West Texas Intermedi-ate (WTI). This means that crude oilimports into the United States are usuallypriced in relation to WTI. The Organiza-tion of Petroleum Exporting Countries(OPEC), a cartel of some of the world’sleading producers, has its own reference,known as the OPEC basket, which is anaverage of seven crude oils. Six of thecrude oils included in the OPEC basketare pumped by member countries, andthe seventh is from Mexico. In practice,however, price differences are not large.
The Q&A segment was largely adapted from: theFAQ on Chicago Board of Trade web site, www.cbot.com/cbot/pub/page/0,3181,1065,00.html, andBBC News online, Oil Markets Explained, http:// news.bbc.co.uk/2/hi/business/904748.stm.
1973 1976 1979 1982 1985 1989 1991 1994 1997 2000 2003 2006
$ / B A R R E L
Refiner Acquisition Price of Crude Oil, 1982-’84 dollars
Refiner Acquisition Price of Crude Oil in That Year’s Dollars
Nominal vs. Real Oil Prices
sOUrCE: the Fedeal reeve Bank of s. Loui