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Crude oil - the different benchmarks for traders and investors

Transactions in crude oil are carried out all
over the world, and there can be aBrent
bewildering variety of contracts and vehicles
at different prices, so it can be confusingBrent, or actually Brent Blend, is a
for traders looking for a suitable benchmark.combination of crude oil from 15 different
In addition, each type of vehicle has manyoil fields in the Brent and Ninian systems in
different options and futures with variousthe North Sea. Its API gravity is 38.3
expiry dates, so this brief paper describesdegrees, slightly heavier than WTI but still
the  main  vehicles  for  CFD  traders.light, and it contains about 0.37% of
sulphur,  again  sweet  but less so than WTI.
The two main crude oils which are either
traded themselves or whose prices areBrent blend is ideal for making gasoline and
reflected in other types of crude oil aremiddle distillates, both of which are
West  Texas  Intermediate  and  Brent.consumed in large quantities in the North
Western Europe, where it is normally refined.
Types  of  crudeThere are times though when the arbitrage
between Brent and other crude oils makes it
The main differences in the type of extractedworth exporting. Brent has been known to be
crude relate to viscosity and sulphurrefined in the United States (typically the
content. Viscosity is measured by APIEast Coast or the Gulf Coast) or the
gravity, which is a measure of how heavy orMediterranean  region.
light the petroleum liquid is compared to
water. The higher viscous crudes are calledBrent blend production is also in decline,
"heavy", and those with a lower API figurebut it remains the major benchmark for other
are  classed  as  "light".crude oils in Europe or Africa. It is
generally priced at about a $4 per-barrel
Those crudes with higher sulphur content arepremium to the OPEC Basket price or about a
called "sour", and the lower sulphurs are$1 to $2 per-barrel discount to WTI, although
"sweet".on a daily basis the pricing relationships
can  vary  greatly.
The heavier and more sour the extracted crude
is, the more difficult and expensive it is toNYMEX  Futures
turn into usable refined products, so the
benchmarks usually chosen are for light,The NYMEX (New York Mercantile Exchange)
sweet  crudes.futures price for crude oil, which is another
major benchmark, represents on a per barrel
Typically, there is a price differentialbasis the market value of a futures contract
between light sweet crudes and heavier sourto either buy or sell 1,000 barrels of WTI or
issues, but this has risen in recent years assome other light, sweet crude oil at a
a result of the decrease in the supply ofspecified  time.
light, sweet crude, which means. Higher
quality crude supplies are always consumedAlthough most NYMEX crude oil contracts are
first, and the world is now increasinglynever executed for physical delivery, the
reliant  on  a  lower  quality  product.NYMEX market supplies important price
information to US buyers and sellers of crude
Data from OPEC suggests that globaloil in the US and around the world, making
production of light, sweet crude actuallyWTI the benchmark for many different crude
declined between 2000 and 2004, so this mightoils,  especially  in  the  Americas.
be seen as the beginning of the 'peak oil'
scenario.Typically, the NYMEX futures prices tracks
very closely the WTI spot price as above,
West  Texas  Intermediate  (WTI)although since the NYMEX futures contract for
a given month expires 3 days before WTI spot
This is a major benchmark for oil traders andtrading for the same month ceases, there can
is the underlying commodity of the New Yorkbe a period in which the difference between
Mercantile Exchange's oil futures contracts.the NYMEX futures price and the WTI spot
Although WTI has traditionally had a higherprice  widens  noticeably.
price than that of Brent crude, recently this
has  contracted  and  even reversed at times.OPEC  Basket  Price
WTI is a light crude and with an API gravityFor more detailed crude oil pricing, OPEC
of 39.6 degrees it is lighter than Brentcollects pricing data on a basket of seven
Crude. It contains about 0.24% sulphur, andcrude oils, including: Algeria's Saharan
it is also sweeter than Brent. It is ofBlend, Indonesia's Minas, Nigeria's Bonny
very high quality and is excellent forLight, Saudi Arabia's Arab Light, Dubai's
refining  a  larger  portion  of  gasoline.Fateh, Venezuela's Tia Juana Light, and
Mexico's  Isthmus  (a  non-OPEC  crude  oil).
Although the production of WTI crude oil is
on the decline, it still is the majorOPEC uses the price of this basket to monitor
benchmark of crude oil in the Americas. WTIworld oil market conditions. Because WTI
has generally been priced at about a $5 to $6crude oil is a very light, sweet crude, it is
per-barrel premium to the OPEC Basket pricegenerally more expensive than the OPEC
(see below) and about $1 to $2 per-barrelbasket, which is an average of light sweet
premium to Brent, although on a daily basiscrude oils such as Algeria's Saharan Blend
the pricing relationships between these canand heavier sour crude oils, such as Dubai's
vary  greatly.Fateh. Brent is also lighter, sweeter, and
more expensive than the OPEC basket, although
Our analysis of crude oil at Blue Index usesless so than WTI.
WTI  as  the  benchmark  for US crude prices.



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