Commodity Derivatives, 2nd Edition

CHAPTER 6Crude Oil

6.1 OVERVIEW OF ENERGY MARKETS

Within commodities, the phrase ‘energy markets’ is often loosely used to describe a series of markets, which include:

• Coal
• Renewables
• Electricity
• Nuclear
• Natural gas
• Crude oil

Another popular term is ‘hydrocarbons’, which is a term that could be used to describe an organic compound that consists of carbon and hydrogen. This would include coal, crude oil, and natural gas.

According to the BP Statistical Review of World Energy 2020, (Figure 6.1) the most consumed form of energy is crude oil (33%), followed by coal (27%), and natural gas (24%). Although much publicity is often given to the increase in the use of renewable energy, particularly as a way of reducing the effects of climate change, the overall global consumption figure from this source remains low at 5%.

Since each of these energy sources will be measured in different ways, BP creates an element of equivalence by converting them into a standard measure, referred to as millions of tonnes oil equivalent.

6.2 THE VALUE OF CRUDE OIL

The term ‘crude oil’ does not really describe any specific type of oil, rather the generic state of oils prior to their refinement. For example, the price reporting agency, Platts lists approximately 130 traded crude oils, each with different chemical characteristics that are attractive for different reasons. Thus, when extracted from the ground crude oil may be a pale straw‐coloured liquid or a thick tar‐like substance. The value of crude ...