Trading Crude Oil: Top 10 Terminologies you Need to Know

Without a doubt, crude oil is the most important commodity in the world. Without it, other commodities would be difficult to produce on a large scale. For example, it would be impossible to cultivate corn, cotton, and wheat on large scale without using the large diesel-powered machines.

Because of the large demand and constrained supply, crude oil is one of the most active and liquid commodities.

If you are interested in trading crude oil or related instruments including stocks, easyMarkets provides multiple avenues for you to do this. For example, with our platforms, you can trade WTI and Brent crude oil futures as well as crude oil stocks.

To become an expert in this industry, here there are terms you need to know.

WTI – This stands for West Texas Intermediary. It refers to crude oil produced in the United States.

Brent – This is the benchmark used by traders worldwide. It refers to crude oil mined in any of the North Sea fields in the Brent, Forties, Oseberg and Ekofisk oil fields. Two thirds of crude oil is traded using this benchmark.

Please note: For a long time now, WTI and Brent tend to move in the same direction as shown below.

Sweet Crude – This term is used to refer to crude oil that is light and one that contains low concentration of Sulphur content. This crude oil is easy to transport and refine.

Sour Oil – This is heavy crude oil that contains a lot of Sulphur content. This crude oil is often undesirable.

Shale – This is a fine-grained sedimentary rock that contains a lot of oil and gas resources. To extract it, the hydraulic fracturing technology is used.

Upstream – This terminology refers to activities which happen during the exploration and mining crude oil.

Midstream – These are activities which happen between the drilling of the crude oil to refining, and transportation of the oil.

Downstream – These are activities which happen after crude oil has been refined. They include the processes of transporting oil to gas stations.

Vertical Drilling – This is a method of mining crude oil where the drilling equipment goes vertically to reach the oil. It is the oldest method still in use in many oil fields.

Hydraulic Fracturing – This is a method similar to vertical drilling. The difference is that after the drilling equipment go down vertically, they are then made to go horizontally. The method allows oil companies to reach oil strongly within the earth’s crust.

Arbitrage – This is a method of trading where you buy one financial asset while simultaneously shorting another one. The easiest way to do this is to buy WTI crude while simultaneously shorting Brent. By doing this, you will benefit from the spread that exists between the two.

BBL – This is the short form for barrels of oil. One barrel of oil is equivalent to 42 gallons of oil.

EIA – This is the abbreviation for Energy Information Administration. This is an organization that collects, analyzes, and projects data on crude oil and other energy sources. Always pay close attention to their weekly releases.

API – This is an abbreviation for American Petroleum Institute. It is a trade association representing all facets of the oil and gas industry. It supports more than 10 million American jobs.

Proved Reserves – These are oil reserves with more than 90% of certainty of commercial extraction.

Probable Reserves – These have 50% chances of commercial extraction.

Possible Reserves – These have 10% chances of commercial extraction.

Production – These are oil and gas fields that have been recovered. Often, when you hear about production, the drilling process is usually in progress.

Reserves – This refers to the proved, probable, and possible reserves.

Contingent Reserves – These reserves with potentially recoverable oil and gas are not yet mature to extract commercially.

Prospective Resources – These are resources that have not yet been discovered and whose presence and volume is based purely on estimates.

Unrecoverable Reserves – These are resources that are not recoverable presently because of geological or technological reasons.

Bid / Ask – This is the same as in other financial instruments. The bid price is the price which buyers are willing to buy and the Ask price is one which sellers are willing to sell. The difference between these two is called spread. The thinner the spread, the higher the liquidity.

CAPEX – This refers to Capital Expenditures. These are funds oil companies use to explore, drill, and transport crude oil.

OPEC – This is the Organization of the Petroleum Exporting Countries. It refers to a group of 12 of the major oil exporting countries.

If you are interested in trading crude oil, you will often come across these terminologies. By having a good understanding about their meaning and implications in the real world will help you make good decisions.

Sources:

https://oilandgasuk.co.uk/glossary/

http://www.mineralweb.com/library/oil-and-gas-abbreviations/

http://www.glossary.oilfield.slb.com/en/Terms.aspx?filter=a&LookIn=term%20name&searchtype=starts%20with

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