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Commodity Derivatives: Markets and Applications by Neil C. Schofield

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5
Crude Oil
I call petroleum the devil’s excrement. It brings trouble...
Juan Pablo Perez Alfonso
SYNOPSIS The purpose of this chapter is to describe the trading of crude oil and outline some of the derivative instruments that can be used to manage the associated price risk.c
 
The first section details the main chemical properties of crude oil, which determine its value. An overview of the physical supply chain is presented, with a description of how crude oil is refined. Since crude oil is of little use in itself, the demand for crude oil is in effect refiner demand.
The main components of demand and supply are then analysed, which leads to a discussion of the main price drivers. Consideration is also given to defining the price of crude oil as well as detailing the term structure of prices.
The section on trading of crude oil outlines why trading takes place, the major participants, the key market risks and some of the associated strategies. This part of the chapter also highlights the main features of the Brent and West Texas Intermediate (WTI) markets.
The chapter concludes by considering a variety of derivative risk management solutions along the supply chain.

5.1 THE VALUE OF CRUDE OIL

The term “crude oil” does not really describe any specific type of oil, but rather the generic state of oils prior to their refinement. There are over 100 different types of crude oil, each with different chemical characteristics that are attractive for different reasons. Thus, when ...

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