Forex trading,foreign exchange market, crude oil 12

Why is crude oil so important?

Oil is one of the most important raw materials we have. Everyday we use hundreds of things that are made from oil .
Oil are also important for the number of jobs they provide. Tens of thousands of people work in the oil  industry. Each week Britain produces about two million tonnes of oil . This is worth about £37 million pounds a day to the people of Britain.

Oil: lifeblood of the industrialised nations Oil has become the world's most important source of energy since the mid-1950s. Its products underpin modern society, mainly supplying energy to power industry, heat homes and provide fuel for vehicles and aeroplanes to carry goods and people all over the world.

In fact, oil meets 97 per cent of the UK transport sector demand. In addition, it also benefits our lives in being vital to the production of many everyday essentials. Oil’s refined products are used to manufacture almost all chemical products, such as plastics, fertilisers, detergents, paints and even medicines, plus a whole host of other products that you might not expect.

Most oil is used for transport (car, lorries and planes) but around a quarter used for heating, chemical plants and in other industry 

Here are some examples of what we owe to oil, every day of our lives:
  • At school: rulers, crayons, ink and cartridges, glue, coverings on books, binders...
  • For your health: coatings for pills, binding agent for creams, disposable syringes...
  • In the home: contact lenses, cosmetics, clothing, fabrics, nail polish, deodorants, shampoo, paint, upholstery and carpets, detergents for washing up and laundry, dry-cleaning fluid...
  • Out shopping: shopping bags, credit cards, egg cartons, plastic milk bottles
  • While cooking: non-stick pans, cling film, storage containers
  • For building: roofing tiles, pipes, insulating material, paint
  • On the move: petrol and diesel for cars and lorries, emergency services and trains, asphalt road surfaces
  • In the office: computer hardware, phones and faxes, diskettes, pens, chairs, printing ink
  • At your leisure: CDs, videos, cassette tapes, camera film, artists' paint, bicycle handlebar grips, tyres, crash helmets, football boots, trainers, shin pads, windsurfers, roller blades
  • Garden: fertilisers, pesticides, garden furniture

How is crude oil extracted?

The extraction of petroleum is the process by which usable petroleum is drawn out from beneath the earth's surface location.

Geologists and geophysicists use seismic surveys to search for geological structures that may form oil reservoirs. The "classic" method includes making an underground explosion nearby and observing the seismic response, which provides information about the geological structures underground. However, "passive" methods that extract information from naturally occurring seismic waves are also used.

Other instruments such as gravimeters and magnetometers are also used in the search for petroleum. Extracting crude oil normally starts with drilling wells into an underground reservoir. When an oil well has been tapped, a geologist (known on the rig as the "mudlogger") will note its presence.
Historically in the United States, in some oil fields the oil rose naturally to the surface, but most of these fields have long since been used up, except in parts of Alaska. Often many wells (called multilateral wells) are drilled into the same reservoir, to an economically viable extraction rate. Some wells (secondary wells) may pump water, steam, acids or various gas mixtures into the reservoir to raise or maintain the reservoir pressure and economical extraction rate. 

Crude oil extraction process

Before learning the costs components of crude oil extraction, let’s take a look at how producers extract crude oil from the ground.



First, a crude oil well is created by drilling a hole into the earth with an oil rig. A steel pipe is placed inside the oil well for structural strength. Then holes are made at the bottom of the well so oil passes through the base. Collection valves are fitted at the top. These valves maintain pressure when crude oil is pumped.

The oil extraction process includes the following three stages: primary, secondary, and tertiary.

Primary recovery

Primary recovery is the first stage of crude oil extraction. In this stage, crude oil flows naturally under the base of the oil rig. The natural underground pressure in the oil well pushes the oil up to the surface, or an artificial lift is used to pump crude oil to the surface. This stage allows ~5% to ~15% of the oil in the reservoir to be extracted.

Secondary recovery

The natural flow of crude oil due to underground pressure will diminish over time. So a secondary recovery is used to extract crude oil from the well. In this method, the natural flow of oil is increased by increasing the reservoir pressure. This is accomplished by injecting water or natural gas into the well, which drives the crude oil to the base where the oil can be pumped. This stage allows ~35% to ~45% of the oil in the reservoir to be extracted.

Tertiary recovery

When crude oil extraction from secondary recovery becomes impossible, tertiary recovery is applied. In this method, water, gas, and chemicals are injected into the reservoir to improve the natural flow of crude oil. Finally, crude oil is extracted. This stage allows ~5% to ~15% of the oil in the reservoir to be extracted.

When crude oil prices are high, this method can be used to increase oil extraction, and vice versa. The recent decline in oil prices impacts the margins of oil producers. Oil producers who are using tertiary recovery methods to extract crude oil are impacted the most. Some of the US shale oil producers include Southwestern Energy (SWN), Chesapeake Energy (CHK), Halcon Resources (HK), Continental Resources (CLR), and EOG Resources (EOG).

Now that we know something about the extraction process, let’s take a look at the production cost of crude oil and its implications on oil prices. We’ll analyze this in the next part of this series.

What are the impacts of crude oil options trading in the commodity market?
Crude oil is one of the better commodities to trade. The market is incredibly active, and it's well known to investors around the world. Oil prices fluctuate on the faintest whisper of news regarding pricing, which makes it a favorite of swing and day traders looking for that edge.
This environment can provide some solid trading opportunities, whether your focus is on day trading futures or you are a longer-term trader or investor.
Crude oil is also one of the most actively traded commodities in the world. The price of crude oil affects the price of many other assets, including stocks, bonds, currencies, and even other commodities. The reason? Crude oil remains a major source of energy for the world, despite increased interest in the renewable energy sector.

Crude Oil options are option contracts in which the underlying asset is a crude oil futures contract.
The holder of a crude oil option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying crude oil futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.

Crude Oil Option Exchanges

Crude Oil option contracts are available for trading at New York Mercantile Exchange (NYMEX).
NYMEX Light Sweet Crude Oil option prices are quoted in dollars and cents per barrel and their underlying futures are traded in lots of 1000 barrels (42000 gallons) of crude oil.
NYMEX Brent Crude Oil options are traded in contract sizes of 1000 barrels (42000 gallons) and their prices are quoted in dollars and cents per barrel.

Call and Put Options

Options are divided into two classes - calls and puts. Crude Oil call options are purchased by traders who are bullish about crude oil prices. Traders who believe that crude oil prices will fall can buy crude oil put options instead.
Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Crude Oil Options vs. Crude Oil Futures

Compared to the outright purchase of the underlying crude oil futures, crude oil options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.

Additional Leverage

Compared to taking a position on the underlying crude oil futures outright, the buyer of a crude oil option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying crude oil futures.

Limit Potential Losses

As crude oil options only grant the right but not the obligation to assume the underlying crude oil futures position, potential losses are limited to only the premium paid to purchase the option.


Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a crude oil option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

MCX crude oil options register 97% growth in volume since launch in May 2018

The crude oil options have registered an average daily turnover and volume of Rs207cr and 4,73,900 barrels, respectively, in the month of November 2018 (till November 26, 2018).

Since its launch in May 2018, MCX crude oil options has been witnessing increased traction. MCX crude oil options registered an average daily turnover and volume of Rs207cr and 4,73,900 barrels, respectively, in the month of November (till November 26, 2018). This is in comparison to respective figures of Rs117cr and 2,40,600 barrels in May, thereby clocking a volume growth of 97%.

During the month, the contract also witnessed a record turnover and volume of Rs582cr and 13,62,600 barrels respectively on November 14, 2018. The open interest hit a high of 6,26,500 barrels in the month.

This signifies the increasing acceptance of crude oil options amongst market participants. The European-styled crude oil option is based on the underlying MCX crude oil futures contract (100 barrels) traded on the exchange.

The value chain participants who use the crude oil derivative products in their manufacturing process are exposed to the drastic crude oil price movements. The average daily volatility in crude oil prices for this year has been at 1.80%. This highlights the significance and the need for derivatives products such as options as a price risk management instrument for the energy stakeholders in the value chain including petrochemicals, glass manufacturing, textiles, heat treatment sectors, and transportation, which are highly exposed to crude oil price volatility.

Mrugank Paranjape, MD & CEO, MCX, said, “The introduction of a crude oil options contract in May was a logical step to ensure our participants have greater accessibility to the energy derivative products. Paired with MCX crude futures, the options as a product has drawn a strong appeal. The contract has been offering immense value to its stakeholders by facilitating price discovery, offering protection and hedging opportunities to increasingly vulnerable industry participants.”

Sanjay Rawal, President, Commodity Participants Association of India (CPAI), said, “Ongoing volatility in the crude oil market would have encouraged hedging activity in the energy derivative segment on MCX. The MCX crude oil options contract has proved to be yet another successful tool in satisfying the risk management needs of the stakeholders who were looking at hedging against the volatility in the prices of fuels such as aviation fuel, furnace oil, and naphtha, as they have a very strong correlation with crude oil prices.”

Karunakaran Hari, Head of Business Development, Trafigura (India), said, “It is notable that since its launch early this year, India’s first crude oil options contract has been gaining momentum. India is the world's third largest consumer of crude oil and with lower-to-flat crude production, India depends heavily on imports. For the crude oil industry, the MCX crude oil options contracts serve as a risk-mitigating tool which helps to better manage their price exposure in crude oil.”

Commodity exchanges MCX, NCDEX and NMCE will be allowed to offer trading on options, once market regulator Sebi releases the framework for the same in the middle of January 2017. This is likely to result in the probable entry of new participants into the space, which may transform the commodity markets

What is the difference between Brent, shale and crude?

Brent Crude is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes (also known as the BFOE Quotation). The Brent Crude oil marker is also known as Brent Blend, London Brent and Brent petroleum.
Brent is the leading global price benchmark for Atlantic basin crude oils. It is used to price two thirds of the world's internationally traded crude oil supplies. 

Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution. These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas. The resulting oil can be used immediately as a fuel or upgraded to meet refineryfeedstock specifications by adding hydrogen and removing impurities such as sulfur and nitrogen. The refined products can be used for the same purposes as those derived from crude oil. 
The term "shale oil" is also used for crude oil produced from shales of other very low permeability formations. However, to reduce the risk of confusion of shale oil produced from oil shale with crude oil in oil-bearing shales, the term "tight oil" is preferred for the latter. The International Energy Agency recommends to use the term "light tight oil" and World Energy Resources 2013 report by the World Energy Council uses the term "tight oil" for crude oil in oil-bearing shales.

Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. A type of fossil fuel, crude oil can be refined to produce usable products such as gasoline, diesel and various forms of petrochemicals. It is a nonrenewable resource, which means that it can't be replaced naturally at the rate we consume it and is, therefore, a limited resource.

More About Crude Oil

Crude oil is typically obtained through drilling, where it is usually found alongside other resources, such as natural gas (which is lighter and therefore sits above the crude oil) and saline water (which is denser and sinks below). It is then refined and processed into a variety of forms, such as gasoline, kerosene, and asphalt, and sold to consumers.

Although it is often called "black gold," crude oil has ranging viscosity and can vary in color from black to yellow depending on its hydrocarbon composition. Distillation, the process by which oil is heated and separated in different components, is the first stage in refining.

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