Oil and Natural Gas Commodity MarketThe Largest Commodity Market of the World

ENERGY COMMODITIES Highest by value- current market size. Known as hard commodity as it is mined. Highly tied to the political stability of the main countries.

Oil wells are used to release the oil from within the earth. Some of the earliest developed oil wells were drilled in China using bamboo poles in 347 A.D. for the sole purpose of providing enough fuel to create a thriving salt industry.

By the 1950s, crude oil became a global energy source, which in effect killed the whaling industry by making whale oil obsolete.

Main products- West Texas Intermediate Crude Oil Brent Crude Oil Natural Gas Heating Oil Ethanol Purified Terephthalic acid

Oil

Type API Gravity

Light-Lower density

ViscosityHeavy-

Higher density Viscosity

Sulphur Content

Sweet-Less Sulphur (<0.5%)

Sour-Excessive Sulphur

(>0.5%)

Oil

Nam

es

BrentLight Sweet oil

from North Sea

West Texas Intermediate

Light Sweet benchmark in

USDubai Light Sour

Persian Gulf

OPEC Basket 13 different regional oils Ex

chan

ges

New York Mercantile Exchange (NYMEX)

Intercontinental Exchange (ICE)

Multi Commodity Exchange (MCX)

Chicago Mercantile Exchange (CME)

Tokyo Commodity Exchange (TOCOM)

Size- $5trApprox. 7% of global GDP shareAnnual growth (2009-14)- 11.9%

OPEC & PETROLEUM MARKET OPEC (Organization of the Petroleum Exporting Countries) is an international organization whose mission is to coordinate the

policies of the oil-producing countries. IT was formed in 1960 in Baghdad Conference to try to counter the oil companies cartel, which had been controlling posted

prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972.

The policy statement states that the countries have a right to exercise their sovereignty over their natural resources. Headquarters at Vienna, Austria.

Sheikh Ahmed Zaki Yamani- Former Oil Minister, Saudi Arabia; Former General Secretary, OPEC

It’s the longest running Economic Cartel in the known history.

Because OPEC is an organisation of countries (not oil companies), individual members have sovereign immunity for their actions, meaning that OPEC is not regarded as being subject to competition law in the normal way

OPEC & PETROLEUM PRICES

Former Saudi Oil Minister Sheikh Yamani famously said in 1973: "The stone age didn't end because we ran out of stones."

• When the future price of a commodity (e.g. oil) is higher than its present price, a situation known as "contango", it is more profitable for a commodities producer to store the commodity and sell it at a later date.

• This causes oil price volatility through various channels:

• For example, storage of a commodity causes supply to be reduced in the present, raising spot prices, while expectations regarding future supply increase - thereby reversing the cycle, which then causes contango all over again.

CRUDE OIL GRADES West Texas Intermediate (WTI)

Brent Crude Dubai/Oman OPEC Reference Basket

Composition Sweet, Light0.31% Sulphur39.6 API

Sweet, Light0.37% Sulphur38.06 API

Sour, Heavy2% Sulphur31 API

Weighted average of oil from OPEC countries

Region North America (major hub- Oklahoma)

North Sea, Atlantic Basin

Persian Gulf OPEC

Significance Benchmark for oil and underlying in North America

Benchmark price of worldwide purchases of nearly 2/3 oil trade

Benchmark Persian Gulf Crude for exports to Asia

Benchmark for oil produced by OPEC countries

Indexes traded NYMEX ICE, NYMEX DME OPEC Reference Basket

Contract 1000 barrel (42000 gallons)1 tick = $10

1000 barrel (159 m3)1 tick = $10

1000 barrel (159 m3)1 tick = $10

-

Trading World Oil Price by EIA Brent Index for cash futures on ICE

Dubai benchmark -

Contract Specifications

Ticker Symbol Crude Oil- CL (NYMEX) or WTI (ICE)

Natural Gas-NG (NYMEX)

Contract Size 1,000 U.S. barrels (42,000 gallons) 10,000 million Btu (also available at 25% & 50% of normal size)

Deliverable Grades Domestic crudes<=0.42% sulphur; 37<API<42Foreign crudes<=0.42% sulphur; 34<API<42

Pipeline specifications in effect at time of delivery

Contract Months All months

Trading Hours NYMEX Open Outcry: Monday-Friday 9am- 2:30pm ESTeCBOT Electronic: Sunday-Friday 6pm-5:15pm CST

Last Trading Day third business day prior to the 25th calendar day of the month preceding the delivery month

three business days prior to thefirst calendar day of the delivery month

Last Delivery Day Last calendar day of the delivery monthPrice Quote Dollars and cents per barrel Cents per million Btu (mmBtu)Tick Size NYMEX: 1 cent per barrel ($10.00

per contract)NYMEX: .1 cents per mmBtu ($10/per contract)

Crude Oil (CL) 2014 (14) May (K) at $108.52/barrel (108.52)Hence, contract size- $108.52 x 1,000 barrels = $108,520

CL14K @ 108.52

Natural Gas (NG) 2014 (14) May (K) at $10.946/mmBtu (10.946Hence, contract size- $10.946x10,000mmBtu= $109,460

NG14K @ 10.946

CRUDE OIL CONTRACTS

NATURAL GAS The Natural Gas price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas

pipeline systems that draw supplies from the region’s prolific gas deposits. Natural gas is difficult to store or transport unless converted to Liquid Natural Gas. There are many factors influencing the price of natural gas, the majority including weather, storage, production and

incremental supply from LNGs. The spread between natural gas futures and electricity futures called the spark spread can be used to manage risk exposure in

the energy markets.

The futures contract is available for trading on the Chicago Mercantile Exchange's Globex electronic trading platform nearly 24 hours per day, and clears through the New York Mercantile Exchange clearinghouse.

SHALE OIL & GAS Shale gas is natural gas that is found trapped within shale formations, often independent of the Shale Oil.

Shale Oil, also called Light Tight Oil by International Energy Agency, is found in the Shale rock formation and extracted by a process called Fracking.

Together Shale Oil & Gas are changing the global landscape of energy products and taking the centre of gravity away from the OPEC nations.