COMMODITIES

MARKET
CRUDE OIL

SUBMITTED BY:- Chaitali Bharucha 30

Lily Geddam 39
 INDEX

No. Topic Page no

1 Introduction 3

2 Daily prices 5

3 Trend 6

4 Factors affecting the price 7

5 Impact on inflation and consumers 9

6 Government Policies 10

7 Relation with Equity market 11

8 Relation with other commodities 11

9 Other linked markets 12

10 Dependent industries 13

11 Worldwide impact 15

12 Facts 16

14 Price of oil in the future 18

15 Conclusion 19

16 Reference 20

2
 INTRODUCTION

Oil and gas are of paramount importance in economies worldwide. There is hardly a
nation that does not seek this indispensable natural resource. A country that already
possesses oil wants more. Nations struggle to explore for oil, and import it at almost any
cost. It is also an important contributor to the export realisations of many countries. Crude oil
is a mixture of hydrocarbons that exists in liquid form in underground reservoirs. All
industries are directly or indirectly dependent on derivatives from crude oil.

 Indian scenario:-

The history of the oil sector in India dates back to the late 19th century, when oil was
first struck at Digboi in Assam in 1889. In the subsequent period, till the 1960s, oil
exploration and production activities were largely confined to the North-Eastern region.
Although the exploration and production activities were dominantly under Government
control, the nationalisation of both the upstream and downstream sectors was initiated after
the Oil Shock of 1970s and completed on October 14, 1981. As a result, the international oil
companies withdrew from India. Following nationalisation, controls were imposed by the
Government on the pricing and distribution of crude oil and petroleum products in India.

India is one of the non-OPEC countries much dependent on its imports to fulfil the
domestic consumption demand as it has a much lower level of production. The country has
much depended on coal to satisfy its energy needs in the earlier times but the use of crude oil
and gas is taking over the dominance of coal with the change in time. Oil and gas contribute
to around 45% of the country’s total energy consumption. India has around 5.4 billion
barrels of oil reserves with it and the domestic production has increased in the recent past to
reach the 0.8 million barrels per day mark.

 Categories:-

The various types of crude oils are classified according to their geographical
originations, sulphur level and also the density of the oils in some cases. The crude oils are
then termed as ‘heavy’ or ‘light’ oil. They are also divided as per the sulphur level present in
them, as ‘sweet’ or ‘sour’. But, mostly, crude oil is classified on the basis of location only as
oils from different locations have different characteristics and they are also named after the
places of origin. The main types of crude oil according to their geographic locations are:-

1. North Sea crude (benchmark )

2. West African crudes
3. Persian Gulf crudes
4. United Stated crudes
5. Asia Pacific crudes

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 Contract specifications of crude oil:-

Symbol CRUDE OIL

Description CRUDE OIL MMYY

No. of contracts a year 12

Contract duration 3 months

Trading unit 100 barrels

Maximum order size 10,000 barrels

Daily price limit 4%

Price quote Rs. Per barrel

Initial margin 5%

 Benefits of MCX crude futures:-

While energy futures markets in the US and Europe trade many times their underlying oil
production and consumption, the need for active energy futures instruments still exist to a
large extent in the Asia-Pacific.
Safeguard mechanisms:
The MCX crude Futures allows oil producers, refiners, traders and consumers to manage
their crude oil price risk with greater precision and without concerns for counter-party risks
as all transactions are cleared and guaranteed by MCX. It also offers individual investors
with another trading instrument for them to capitalize on their views of the volatile crude oil
prices caused by the political tension in the Middle East.
Real Time Oil Prices:
The best bids and offers on MCX are continuously disseminated on a real-time basis through
price vendors for the benefits of all market users. This gives market users a real-time price
reference that is fair, equal and easily accessible. MCX also provides a daily settlement
price.
Wider Market Participation:
With counter-party risk addressed by the clearing and guarantee offered by MCX, there can
be greater involvement by more participants. In addition to larger and more active oil
companies, smaller companies and MCX individual members and individual investors would
also be able to trade MCX Crude Futures.
Flexible Transaction Size:
The relatively small contract size of 100 barrels allows oil market participants to hedge
varying sizes of crude oil exposure effectively.

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 DAILY PRICES

 Week 1:-

DATE DAY CLOSE PRICE

1st Feb 2010 Monday 3441

2nd Feb 2010 Tuesday 3614

3rd Feb 2010 Wednesday 3620

4th Feb 2010 Thursday 3475

5th Feb 2010 Friday 3384

 Week 2:-

DATE DAY CLOSE PRICE

8th Feb 2010 Monday 3426

9th Feb 2010 Tuesday 3489

10th Feb 2010 Wednesday 3519

11th Feb 2010 Thursday 3553

12th Feb 2010 Friday 3482

 Week 2:-

DATE DAY CLOSE PRICE

15th Feb 2010 Monday 3494

16th Feb 2010 Tuesday 3601

17th Feb 2010 Wednesday 3613

18th Feb 2010 Thursday 3673

19th Feb 2010 Friday 3714

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TREND

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 FACTORS AFFECTING THE PRICE

India fulfils its major crude oil requirements by importing it from oil producing
nations. India meets more than 74% of its requirement by importing process. Therefore, any
upward and downward motions of prices are closely tracked in the domestic marketplace.
Many times it has been recorded that prices of essential products like crude also acts as a
prime driver in becoming reason of up and down movement of price.
Any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price
implies to the higher price of energy, which in turns negatively affects other trading practices
that are directly or indirectly depends on it. Crude Oil has been traded in throughout the
world and there prices are behaving like any other commodity as swinging more during
shortage and excessiveness. In the short term, price of crude oil is influenced by many
factors like socio and political events, status of financial markets, whereas from medium to
long run it is influenced by the fundamentals of demand and supply which thus results into
self price correction mechanism.
The crude oil prices have been buffeted by many factors, which are summarized as
below

 Currency Fluctuations: The prices of oil on 5th Feb slipped as the dollar strengthened
whereas it had gone up on the 2nd Feb due to weaker dollar.
 Speculative buying and selling
 Production: The OPEC nations are the major producer of world's crude oil. Therefore,
every policy made by such countries related to the crude oil prices has their influence on
crude oil prices. Any decision taken by OPEC nations for increasing or decreasing
production of crude oil impacts the price level of crude oil in international commodity
markets.
 Natural Causes: In prevent years, global community have witnessed many events which
in turns have volatility effects on the price level of crude oil. Like hurricane Katrina and
other type of tropical cyclone have hit the major portion of globe, which as a result driven
the crude oil prices to reach at its peak. Oil refineries in the US are operating at just
77.7% of the capacity due to hurricane disruptions and possibility of Iran’s nuclear war
plans.
 Inventory: In throughout the world, oil producers and consumers get stock their crude oil
for their future requirements. This gives rise to speculation on price expectations and sale
chances in case any unexpected thing cracks during supply and demand equations. Any
upward or downward movement in inventory level shoots up volatility in price index of
crude oil, which generates lot of changing movement in sensex. In the 1st week around 5th
Feb oil prices fell as rising crude inventories in US.
 Demand & supply: With a sharp rise in economic demand, requirement of crude oil is
increasing to manifold in context to the limited supply. High level of unemployment
figures in d US dampened the expectations for stronger demand which caused the oil
price to fall around 5th Feb.

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 Oil prices have increased more than 11% in last two weeks. Energy prices dipped
overnight after the Federal Reserve announced that it will remove the ‘discount lending rate’
which caused the dollar to its highest level since May. This caused the price of oil to oil in
between. On the 19th of Feb 2010 price is the highest as a refinery strike in France (refinery
called Total) and worries over Iran’s nuclear programme suggested petroleum supplies may
tighten in the future. The US imports from Europe and other disruptions have caused they
energy prices to go up. Also, the United Nations International Atomic Energy said that Iran
may be working on a nuclear warhead raising concerns about a military build up in the
region and the availability of oil supplies from this region.

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 IMPACT ON INFLATION AND CONSUMERS

The petroleum sector has a major influence on the inflationary trend in a country like
India. This is because in India (like in many other developing countries), the total oil
consumption in relation to GDP is relatively high as compared with many developed
countries in North America and Western Europe. The oil and gas sector constitutes 15% of
the GDP. A high level of oil consumption in relation to output implies high oil intensity.
Japan and four major European countries (France, Germany, the UK and Italy) are the least
oil intensive. The last decade and a half has shown a marginal change in oil intensity across
nations. In the case of India, because of a high level of oil intensity (in relation to GDP), the
energy sector (Fuel, Power, Light & Lubricants) has a significantly higher share of 14.23%
in the Wholesale Price Index (WPI), which is a measure of inflation in the country. This
figure implies that for every10% rise in the prices of products in the energy sector, the
inflation (as measured by WPI) would go up by 1.4 percentage points.

In simple language we can say that, there is a direct relation between crude oil and
inflation. As we know, every commodity and goods are transported from one place to
another, be it electronics, vegetables, fruits, clothes, medicines, think of anything you buy.
Now if the price of crude oil rises, the cost of fuels like petrol, diesel etc will also rise (as
they are extracted from crude oil). So the transportation costs will rise too. To overcome
those costs, the companies and firms will raise the price of their products. Hence the end
users, i.e. us, have to pay more for those products. That’s the rise in inflation.

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 GOVERNMENT POLICIES

India is one of the top 10 oil-consuming countries in the world. Oil and gas represent
over 40 per cent of the total energy consumption in India. The consumption of petroleum
products in the country is on the rise and demand already far exceeds domestic supply.
Therefore, the country has to depend largely on imports.

Recently, Government has proposed to increase the fuel prices. The report submitted
by Mr. Kirit Parikh, if accepted by the government could boost the prospects of the state-
owned oil firms. This is because deregulation of petroleum prices at a time when energy
prices are moving northwards globally will certainly translate into secular rise in domestic
fuel prices. Several European countries have adopted a high fuel price policy which has
actually resulted in curbing its unproductive usage. But these recommendations will dent the
already fragile monthly budgets of households and may generate huge outcry. But this pain
is short term and actually necessary to ensure that the country retains its ability to invest for
future growth. Private sector companies like PIL, Essar Oil and Shell India could benefit the
most. The proposed prices of petrol and diesel are as follows:-

CURRENT PRICE EXPECTED PRICE

PETROL 48.55 51.55

DIESEL 35.21 36.45

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 RELATION WITH THE EQUITY MARKET

There is an inverse relation between crude oil prices and the equity market.
Companies like Reliance and ONGC make up the BSE index Sensex. They majorly affect
the movement of the index. When the price of crude oil increases the profits of these
companies is affected. This will affect the price of the shares of these companies and thus the
Sensex will be pulled down. And the vice-versa is also true. Therefore we can see that there
is an indirect relation between the crude oil price and the movement of the equity index.
Moreover increased oil prices will cause inflation which will reduce d purchasing power of
money and hence investors will withdraw money from the market causing the index to go
down.

RELATION WITH OTHER COMMODITIES

History suggests that gold enjoys a direct relationship with crude oil prices. Whenever the
price of gold goes up the price of gold goes up as well and vice versa.

Same is the case with silver.

Gasoline prices are more volatile and they do not respond substantially to the changes in
crude oil prices

There is a co-integrated relation of crude oil with cotton, corn and soybean.

There is no co-integrated relation between crude oil and wheat

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 OTHER LINKED MARKETS

Since economic growth and exports are directly related to a country's domestic
industry, it is natural for some currencies to be heavily correlated with commodity prices.
The top three currencies that have the tightest correlations with commodities are the
Australian dollar, the Canadian dollar and the New Zealand dollar. Other currencies that are
also impacted by commodity prices but have a weaker correlation are the Swiss franc and
the Japanese yen. Knowing which currency is correlated with what commodity can help
traders understand and predict certain market movements. The correlation between the
Canadian dollar and oil prices is approximately 80%.

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 DEPENDENT INDUSTRIES

Who benefits from raising oil prices and losses from falling oil prices:-

 Alternative energies like wind, solar, and geothermal, as well as alternative fuels
like biofuels, ethanol, cellulosic ethanol, and fuel cells all see increases in demand when
the price of oil, their main competitor, increases.
 Coal companies see sales growth, as rising oil prices cause consumers to demand more
local sources of energy.
 Hybrid car manufacturers benefit from higher oil prices because high oil prices lead to
higher gas prices, causing consumers to seek out ways to reduce the amount of gasoline
they use.
 Independent Oil & Gas companies benefit the most from high oil prices, as they can
extract crude at a relatively constant cost from a reserve, but sell it at higher and higher
prices. The higher the price of oil, the larger an E&P company's margins.
 Machine tools & accessories companies also benefit, as they sell individual parts to
oilfield services companies that build, retrofit, and repair rigs.
 Deepwater drilling contractors like Transocean and Diamond Offshore Drilling are even
better off than their peers in the oilfield services industry; there are far fewer deepwater
rigs in the world than normal rigs.

Who loses from raising oil prices and gains from falling oil prices:-

 Oil & Gas Refining & Marketing companies buy crude oil, process it, and sell the
processed product to the end market. When these companies must purchase crude oil at a
higher price, they then have to sell the refined product (gasoline, jet fuel, diesel, etc.) at a
higher price, which then causes demand to drop as people travel less. The clear losers, in
this case, are the companies that make and sell gasoline, though when oil prices fall, they
fall further than gasoline prices, making refiners the winners.
 Shipping companies are harmed by higher oil prices because oil is necessary to operate
the planes, trucks, and ships that transport goods around the globe. Also, aircraft leasing
companies are hurt by rising oil prices.
 Airlines are harmed by rising oil prices; in the past, jet fuel has accounted for 10-15% of
an airline's cost, but by mid-2008 they made up 30-50% of costs.
 The lodging industry sees declines in occupancy rates and revenues when oil prices rise,
as higher travel prices cause fewer consumers to take vacations.
 Other vacation and travel alternatives (e.g. cruise lines like Royal Caribbean
Cruises and Carnival) see higher fuel costs, forcing them to raise prices and drive
potential customers away.

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 The Chemical industry is harmed by higher oil prices because petroleum is a key
ingredient in plastics.
 The retail industry is harmed by rising oil prices because shipping companies charge
higher prices, making it more difficult for retailers to get their products to market and
forcing them to raise prices.
 Online retailers that subsidize the cost of shipping, like Amazon.com and Overstock.com,
are forced to pay part of the shipping price increases, causing margins to shrink.
 Car companies that are heavily dependent on sales of SUVs for profits, such as General
Motors and Ford, see fewer sales as consumers tend to reduce their purchases "gas-
guzzlers" when oil prices are high.
 Automotive parts retailer who depend on heavy driving and automotive wear-and-tear,
struggle when drivers conserve due to high oil prices and demand fewer repairs.

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 WORLDWIDE IMPACT

Few inputs impact the world economy like the price of oil. Oil powers cars, trucks,
boats, airplanes, and even power plants that make up the backbone of the global economy.
As oil prices rise, costs go up for transportation companies, squeezing their profit margins
and forcing them to raise prices, similarly affecting all the other companies that rely on them
to transport products and people. By contrast, most energy companies benefit from higher oil
prices, either from higher revenues for oil, or because of increased demand for substitute
energy sources such as ethanol and natural gas. 2007 and the first half of 2008 were good
times for many energy companies; futures prices rose tremendously, peaking on July 3rd,
2008, at a record high of $145.85. Since then, however, futures prices have plummeted
(dropping below $50 per barrel by early December, 2008), mostly in response to the
recession caused by the 2007 Credit Crunch and 2008 Financial Crisis. The extreme
volatility of this important economic input has piqued interest in issues like peak oil,
speculation, and the world's rising energy appetite, and is leading to greater investment
in renewable energy. The results of the sustained higher oil price simulation for both the
OECD and non- OECD countries suggest that, as has always been the case in the past, the
net effect on the global economy would be negative. That is, the economic stimulus provided
by higher oil (and gas) export earnings in OPEC and other exporting countries would be
outweighed by the depressive effect of higher prices on economic activity in the importing
countries, at least in the first year or two following the price rise.

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FACTS

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 PRICE OF OIL IN THE FUTURE

Crude oil prices recovered much faster than the world economy. It is also quite likely
that they will continue their climb well into 2015 when alternative sources of energy will
become more economical. After touching $147 a barrel in July 2008, the price of oil had
fallen to $47 when the world economy was deep in recession. But before the end of 2009 the
price was back to $75-$80 mainly because of the liberal cut in oil supplies by the OPEC and
overbought position in oil futures. The world demand for oil in 2009 was 84.1 million barrels
a day. Non-OPEC sources supplied about 50.4 m/bd leaving the OPEC to cover the rest.
OPEC had cut its quotas to 26.6 m/bd though some of the members, principally Nigeria, did
exceed the quota towards the end of 2009. At the emergency meeting in Angola on
December 22 OPEC members agreed to maintain the same level of production with strict
adherence to quotas. The US is the major consumer of oil with a 22.5 per cent share in world
consumption. Its demand for oil in 2010 is estimated to increase at 1.37 per cent. China and
India account for 10 per cent share but their demand in 2010 may rise by about 5 per cent.
OPEC is relying mainly on these countries to design its production plans. In 2008-09 oil
prices have been subject to violent fluctuations. One reason is the rampant speculation
encouraged by higher risk to which stock markets were exposed. Volatility of oil prices also
hit investment in oil exploration. In 2009, IEA estimated that investment was down 21 per
cent or by $100 billion. As such, production capacity will not increase significantly, though
OPEC members do nurse about 5 per cent spare capacity to meet unforeseen demand.
International prices in 2010 are likely to continue the climb which was witnessed in the
second half of 2009. First, the OPEC is likely to keep its hold on supplies since it has come
to the conclusion that a price below $80 a barrel is uneconomic; second there is bound to be
increase in demand mainly from China and India; third, the dollar is likely to fall against the
euro and the yen and encourage speculation as well. In the first half of 2010 prices may still
move in the range $75-80 a barrel. But in the second half when the world economy is likely
to gather speed the price may jump into the range $80-85. That will not be the end of the
story. The price of oil will keep its climb well into the 2015 when it may touch $150 a barrel.
The year 2010 is critical. For one, countries will have to reduce carbon emissions to honour
their commitments in Copenhagen. Hence fuel efficiency and carbon capture and storage
(ccs) will have high priority. For another, alternative sources of energy will be explored to
beat the high price of oil.

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 CONCLUSION

Crude oil plays a major role in the world economy. There is an increasing demand for it
from almost every country. Most of the industries depend on crude oil for their raw material
requirements. India itself imports 74% of its oil requirements. Various factors such as
demand-supply, natural calamities, currency fluctuation affect the oil prices. Recently the
crude oil prices were up due to news of warhead in Iran. It is observed that there is a direct
relation between crude oil and inflation. Thus crude oil is a very important tool for predicting
the inflation rates. Recently government has proposed to increase the fuel prices to take
advantage of the increased oil prices. But there exists an inverse relation between crude oil
and equity index i.e. Sensex. Two major companies ONGC and RIL which make up the
Sensex hugely depend on crude oil. Crude oil has an interesting relation with gold. The gold
prices and crude oil prices move in the same direction. Oil prices also have strong effect on
the foreign currency rates. Crude oil powers transportation the backbone of our economy. It
drives the economy of a country as well as the whole world. High oil prices have always had
a negative impact on the global economy.

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 REFERENCE

www.mcxindia.com

www.commoditiesonline.com

www.moneycontrol.com

www.commoditiescontrol.com

www.wikinvest.com

www.religarecommodities.com

www.opec.org

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