FUTURES & SWAPS > CRUDE OIL
Crude Oil
Crude oil, also known as petroleum, is the world’s most actively traded commodity. Bought and sold all over the world, crude oil comes in many varieties and qualities. It is found in large quantities below the earth’s surface and is primarily used as fuel and raw material in the chemical industry. Crude oil is refined to produce a wide array of petroleum products, including gasoline, naphtha, heating oil, gas oil, jet fuel and fuel oil.
How Crude Oil Trades
Crude oil is largely traded Over-The-Counter (OTC) in Asia. However, in view of globalization, the trading of futures contract on the New York Mercantile Exchange (NYMEX) and London’s International Petroleum Exchange (IPE) is now available to Asian players.
The 4 main products of crude oil traded Over-The-Counter (OTC) are:
| West Texas Intermediate (WTI) | From the United States, a benchmark for North America |
| Brent | Extracted from the North Sea, a benchmark for Europe and Africa |
| Dubai | From United Arab Emirates (UAE), a benchmark for the Middle East |
| Tapis | From Malaysia, a benchmark in Asia |
There are 6 basic categories of trading crude oil OTC:
| Physical | Trading is done for a wide spectrum of crude oil, whereby seller and buyer will come to an agreement of the full specification of the crude, date and port of delivery, quantity and lastly, but most importantly, price. |
| Swaps | A swap is an agreement to settle in cash the difference between the fixed price of the derivative now and the floating price of the said commodity at a future date.
End-users need to hedge the prices at which they can purchase crude oil. This tool will enable them to lock in the price of the crude oil at which it was purchased for the coming months. The benchmark commonly used for floating prices are the mean of Platts’ Singapore (MOPS) prices, Official Selling Prices (OSP), Ministry of Oil and Gas (MOG), Asian Petroleum Price Index (APPI), and Indonesian Crude Price (ICP). There is no physical delivery. |
| Spread Swaps – Contract for Differences (inter-month spreads) | Spread swaps are created to enable traders to lock in the price differentials between the same products but different months, or the price differentials between different commodities. |
| Crack Spreads | In recent years, crude and product prices have fluctuated extensively in response to extreme weather conditions or political crises. Thus, the spreads have portrayed related volatility.
This crack spreads are designed to hedge between crude and products. This is most popular among refiners so as to protect the refining margin. |
| EFS – Exchange of Futures For Swaps | The conversion of a position into a swaps position via simultaneous buy/sell transactions. |