Crude oil as a commodity traded in Indian commodity exchanges like MCX and NCDEX

CRUDE OIL

Description

Crude oil is a yellowish black mineral oil that is extracted from under the surface of the earth. This oil is consists of a number of hydrocarbon compounds as it is formed from the million of years old animal and plant remnants. This mixture of hydrocarbons remains in the liquid form under the normal atmospheric temperature and when distilled, a number of by-products can also be extracted. Crude oil is also an important ingredient of some medicines due to the curing properties it has.

Crude oil can be of different types depending upon its origin and its relative weight. Brent crude oil is one of the most important types of crude oil and it is also considered as a benchmark in the context of the price fixation of the other types. Brent crude oil is a lighter type crude oil possessing API (American Petroleum Institute) gravity of 38 to 39 units and having medium levels of sulfur.

Overview

Oil is the single most important commodity that holds the position of a key factor in each and every economy of the world. The world�s richest nations are at their current positions just because of the oil factor. The importance of oil has reached such a level at which there is no country in the world, which doesn�t need oil and its by-products, and if somehow it doesn�t have much reserves of oil to meet their domestic demand, these nations are ready to import the product at any cost. Many nations have a huge share of their earnings constituted by oil exports only. Every industry requires oil to function properly either directly or indirectly as both crude oil and its by-products serve as their inputs. The extent of the commodity�s importance was shown to the world when the world�s most strong economies were shaken up as the oil prices shot up in 1973 and 1979 when the gulf countries refused to supply oil to the countries that were the supporters of Israel in its war with Egypt and Syria. Crude oil alone bears 60% share to meet the global energy needs in the current scenario. The reason for this high share in the primary energy consumption in the world is due to the advantages that oil has over the other constituents of primary energy such as diverse application, comparatively lesser harm to the environment, easy handling, lower capital costs and above all higher efficiency.

Crude oil reserves on earth are estimated to be more than 1 trillion barrels that are mostly found in the Middle East, Eastern Europe, Africa and Central America, Middle East being the top reserve holder. It is a clear fact that oil is a limited resource and would finish off in a maximum of 80 years if the current rate of consumption continues. Of these 1 trillion barrels, the world produces around 75 million barrels per day. The largest crude oil producing country is Saudi Arabia followed by Russia and United States of America. The refining capacity of oil in the world as in 2002 was 4166 million tons. The consumption of crude oil in the world has been rising with the change in time and the technological improvements that are accompanying it. Oil is consumed all over the globe, consumption figures standing at 76 million barrels per day and United States of America consumes the maximum level of oil in the world. The major consumer countries of crude oil along with their consumption figures pertaining to the year 2004 are

United States of America (20.7 million barrels/day)
China (6.5 million barrels/day)
Japan (5.4 million barrels/day)
Germany (2.6 million barrels/day)
Russia (2.6 million barrels/day)
India (2.3 million barrels/day)
Canada (2.3 million barrels/day)
Brazil (2.2 million barrels/day)
South Korea (2.1 million barrels/day)
France (2.0 million barrels/day)
Mexico (2.0 million barrels/day)

Regarding the world trade situation, one important aspect is the presence of an organization namely OPEC that controls and regulates the exports and imports of most of the countries of the world. OPEC stands for �Organization of Petroleum Exporting Countries� and the members include all the 11 major crude oil producing countries and nations that are highly dependent on the revenues from oil and oil products. As a matter of fact, OPEC nations have 75% of the world�s total crude oil reserves of 1 trillion barrels and control around 40% of the world oil production. OPEC member countries also dominate the world exports of crude oil contributing to 55% of the total world exports. The major crude oil exporting countries with their exporting figures are

Saudi Arabia* (8.73 million barrels per day)
Russia (6.67 million barrels per day)
Norway (2.91 million barrels per day)
Iran* (2.55 million barrels per day)
Venezuela* (2.36 million barrels per day)
United Arab Emirates* (2.33 million barrels per day)
Kuwait* (2.20 million barrels per day)
Nigeria* (2.19 million barrels per day)
Mexico (1.80 million barrels per day)
Algeria* (1.68 million barrels per day)
Iraq* (1.48 million barrels per day)
Libya* (1.34 million barrels per day)
Kazakhstan (1.06 million barrels per day)
Qatar* (1.02 million barrels per day)

In the above list, the countries with the * sign are the member countries of OPEC. The imports of crude oil are generally done by the countries, which do not have appropriate reserves of oil and are incapable of satisfying the domestic consumption demand. The following is list of the countries with their net import figures that are the major importers of crude oil in the world

United States of America (12.1 million barrels per day)
Japan (5.3 million barrels per day)
China (2.9 million barrels per day)
Germany (2.4 million barrels per day)
South Korea (2.2 million barrels per day)
France (1.9 million barrels per day)
Italy (1.7 million barrels per day)
Spain (1.6 million barrels per day)
India (1.5 million barrels per day)
Taiwan (1.0 million barrels per day)

History

The history of crude oil dates back to the 3rd or 4th century A.D when the presence of oil was first discovered in China. The oil that the early Chinese people found was found to have extremely good medicinal value and was used in the salt form. To extract that oil from under the earth�s crust, first oil wells of around 243 meters were dug up in that region with the help of bamboo poles possessing metal tools at their end. The crude oil was also used for the lighting purposes in Ancient Persia.

When the city of Baghdad was constructed in the 8th century, the streets of that city were paved with tar that was easily available in the natural oil fields in that region. With the time, man discovered new and diversified uses of oil and hence the discovery of new oil fields became an important requirement. People got to know the vast amount of oil that was hidden under the earth�s surface as many geographers started predicting it in that time.

All this time oil had a limited use until in 19th century; the process of distillation of kerosene with the help of coal and rock oil was invented. Production of oil became commercialized and it started an era of establishment of oil refineries throughout the world. One of the first refineries was established at Baku in Russia and it became the world�s largest oil producing refinery. A Russian engineer F.N Semyonov built the first ever modern oil well at the same place in 1848. Up till 1950s coal had dominance among the primary energy constituents but crude oil took over the leadership in a short span of time and has still maintained its reputation.

History of crude oil in India

India was not known to the world in the context of crude oil and it�s by-product production. As late as in 1889, the presence of oil in India was discovered in Digboi in Assam. First crude oil refinery in India was set up in Digboi in1901. Then the exploration and production activities were limited to the North Eastern part of the country. In 1958 and 1974, two more places for crude oil production were identified namely Cambay onshore basin and Bombay offshore basin. Initially the major international companies were given the job to explore and produce oil in the country but after the shock in oil prices in 1973, whole of the sector was nationalized.

Categories of crude oil

The various types of crude oils are classified according to their geographical originations, sulfur level and also the density of the oils in some cases. For differentiation depending upon the gravity of oils, the American Petroleum Institute (API) provides with a basis to measure it�s density, which is called the API gravity. The crude oils are then termed as �heavy� or �light� oil. They are also divided as per the sulfur level present in them, as �sweet� or �sour�. But, mostly, crude oil is classified on the basis of location only as oils from different locations have different characteristics and they are also named after the places of origin. The main types of crude oil according to their geographic locations are

North Sea Crudes � Considered as bench mark

API gravity � around 38.5 degrees
Sulfur level - 0.36%
Examples - Brent, Forties, Osberg, North Sea Basket, Ekofisk, Statfjord and Flotta

West African Crudes �

API gravity - around 35 degrees
Sulfur level � 0.2%
Examples - Bonny Light, Qua Iboe, Brass River, Escravos, Forcados and Cabinda

Persian Gulf Crudes �

API gravity �around 37 degrees
Sulfur level � 1.08%
Examples - Dubai and Oman assessments, Murban, Lower Zakum, Qatar Land, Qatar marine and Banoco Arab Medium

United States Crudes �

API gravity � variable, around 39.6 degrees
Sulfur level � variable, around 0.24%
Examples - West Texas Intermediate (WTI), Mars MOC and Mars, P - Plus WTI, WTI Calendar Delta, West Texas Sour (WTS), Light Louisiana Sweet (LLS), Heavy Louisiana Sweet (HLS), Engene Island, Wyoming Sweet, Bonito, Mars, Poseidon, Basrah Light, Alaska North Slope (ANS), Line 63, P-Plus Line 63, Thums, Kern River

Asia Pacific Crudes �

Examples - Tapis, Belinda, Cossack, Jabiru, North West Shelf, Miri etc

Crude oil producing countries

The following is the production wise list of major crude oil producing countries of the world

Saudi Arabia*
Russia
United States
Iran*
Mexico
China
Norway
Canada
Venezuela*
United Arab Emirates*
Kuwait*
Nigeria*
United Kingdom
Iraq*

The countries with * sign are the current members of OPEC. Saudi Arabia is the leading producer of crude oil with the production figures of 10.37 million barrels per day. The country is followed by Russia with 9.27 barrels and United States with 8.69 barrels of production. The total produce of crude oil in the world is 75 million barrels per day with the total reserves of crude oil estimated to be 1 trillion tons. These reserves would finish off in around 80 years with the same rate of consumption. The OPEC nations provide around 30 million barrels per day that accounts to approximately 40% of world production.

Production of crude oil in India

India is not among the major producers of crude oil, as it doesn�t have much oil reserves. That is why it generally depends on imports of crude oil from other countries. However, the production of oil and as a result the production of its by-products in India has increased in the recent past due to exploration and findings of new oil reserves. India currently has an estimated quantity of 5.4 billion barrels of oil reserves out of which it produces around 0.8 million barrels per day. At this production level, the oil reserves in India would last for around 29 years. The major oil reserves of the country are situated at

Mumbai high (Mumbai)
Upper Assam (Assam)
Cambay (Gujarat)
Krishna-Godavari basin (Andhara Pradesh)
Cauvery basin (Tamil Nadu)
Nagaland
Arunachal Pradesh

The largest crude oil producing oilfield is the Mumbai high field that produces around 260000 barrels per day. Among these production centers, major share of production i.e. 2/3rd share is bagged by the offshore reserves as compared to onshore reserves. The refining capacity of crude oil in India is over 2.1 million barrels per day. The refining sector in India is held by both public and private sector, public sector being the dominating one.

Indian crude oil market

India is one of the non-OPEC countries much dependent on its imports to fulfill the domestic consumption demand as it has a much lower level of production. India is a developing country and the requirement for the oil as a primary energy constituent from the industries in the country is at its peak. The country has much depended on coal to satisfy its energy needs in the earlier times but the use of crude oil and gas is taking over the dominance of coal with the change in time. Oil and gas contribute to around 45% of the country�s total energy consumption.

India has around 5.4 billion barrels of oil reserves with it and the domestic production has increased in the recent past to reach the 0.8 million barrels per day mark. Mumbai high is the largest oil-producing oilfield in India with a production of 2.6 lakh barrels per day. The refining capacity of crude oil in India is estimated at around 2.1 million barrels per day. Regarding the consumption pattern of oil in India, it is the 6th largest consumer country in the world having a consumption of 2.2 million barrels per day. This leaves the country with a huge deficit in the demand-supply scenario and thus 70% of the consumption is met through imports.

India generally imports Oman-Dubai sour grade crude, Brent dated sweet crude and Bonny light crude. The country imports over 1.5 million barrels per day that place it at the 9th position among the largest importers of the world. Though the Indian production has increased in the recent times, the imports were raised by 5% making due to the raised Indian demand of around 4.2%. The countries from which India imports crude oil are

Venezuela
Nigeria
Sudan
Iran
Kuwait

The Indian oil-refining sector has been regulated by the government historically and is still dominated. A new private sector has emerged after the loosening of control by the government. The major units pertaining to the oil sector in India are

Indian Oil Corporation (Public sector)
Oil and Natural Gas Corporation (Public sector)
Reliance India Ltd (Private sector)
Essar Oil Refinery (Private sector)
Bharat Petroleum Corporation Ltd (Public sector)
Hindustan Petroleum Corporation Ltd (Public sector)
Manglore Refineries and Petrochemicals Ltd (Public sector)

Market Influencing Factors

Production of the major oil producing countries
Various climatic or political supply fluctuations
World oil demand
Fluctuations in the value of dollar
Imports from various world oil organizations like API, DOE
Refinery fire

Major trading centers of crude oil

The major trading centers of crude oil in the world are

New York Mercantile Exchange (NYMEX)
International Petroleum Exchange of London (IPE)
Tokyo Commodity Exchange (TOCOM)

In India, crude oil is traded at various commodity exchanges namely Multi Commodity Exchange of India and National Commodity and Derivatives Exchange Ltd.