How is Oil Traded?

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On the physical market, oil trading involves exploration for hydrocarbon deposits, which are drilled, pumped out and refined.

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Traders tend to specialise in one or more oil derivatives, normally from the same distillates group, as well as specific key markets which they are responsible for purchasing from and selling to. There are also analysts to conduct regular market research and provide vital information to the traders.

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Oil trading can also be conducted on the financial markets. Unlike with many other commodities, it is not necessarily supply and demand but instead the oil futures market which dictates the price of oil. Futures are the most common type of derivative contract but oil can also be traded with options and OTC (over the counter) products.

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The countries with the largest oil reserves are Venezuela, Saudi Arabia, Canada, Iran, Iraq, Kuwait, United Arab Emirates (U.A.E), Russia, Libya and Nigeria while the largest refineries in the world are based in India, Venezuela, South Korea, the UAE, the USA, Singapore and Saudi Arabia.

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The Different Crude Oil and Oil Products

 

Crude Oil

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Crude oil (petroleum) is a fossil fuel formed from the remains of sea creatures who died millions of years ago. The increase of temperature and pressure over the millennia converted these remains in to crude oil, trapped beneath the earth’s surface. Once the crude oil has been discovered and pumped out, it is distilled in an oil refinery to separate it in to different products. The different substances have different boiling points and are categorised as such.

 

Light Distillates

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These distillates condense towards the top of the distillation tower. They include:

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• Light Petroleum Gas (LPG) – used industrially and domestically, fuel for vehicles (ignition fuel), refrigerant, chemical feedstock, cooking fuel, centralised heating systems, paper and food processing industries.

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• Gasoline (petrol) – fuel for vehicles from recreational vehicles and cars to small aircraft as well as to power emergency electricity generators.

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• Naphtha – instrumental in petrochemical manufacturing, provides energy for steam cracking (breaking down hydrocarbon molecules).

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Middle Distillates

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• Kerosene – used as fuel for cooking and lighting in less-developed countries, fuel for portable cooking stoves, as an emergency heat source during power failures. Kerosene can also be used in chemistry as a diluent or to store crystals in X-ray crystallography. It is also an effective pesticide and is used in the entertainment industry for fire performances.

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• Jet Fuel – based on either an unleaded kerosene or a blend of naphtha and kerosene, is used in aviation.

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• Diesel/Gas Oil – the only major difference between the two is sulphur content. Gas oil is used as home heating fuel in some Western European countries and is also used in off road agricultural machinery. Diesel, however, is the fuel used for cars, lorries, and other road transport. While diesel engines can run on gas oil, gas oil has a lower tax added to its price so a dye is added to stop people filling their cars up with the cheaper product.

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Heavy Distillates

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• Heavy Fuel Oil (HFO) – this type of fuel oil is used to power ships and power stations. It is also sometimes known as bunker fuel.

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Residuum

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• Asphalt/Bitumen – used for roads and roofing

• Lubricating oils – used to minimise friction, heat and wear between mechanical parts. The most common type of lubricating oil as they are an inexpensive by-product of oil refining.

• Waxes – can be used in candles, foods (chewing gum and cheese wrapping), cosmetics and in waterproof coatings

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Petrochemicals

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After the refining process, certain products go on to be used in the manufacturing of petrochemicals. Naphtha, components of natural gas such as butane and by-products (ethane and propane) are known as feedstocks and undergo a process called cracking to create new products. These products are the building blocks of the petrochemical industry and are further processed until products like plastics, detergents, and synthetic fibres are produced.