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Oil Markets - Essay Example

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Oil Markets

The most important and active exchanges where such transactions take place are the New York Mercantile Exchange and the International Petroleum Exchange, London. Spot and futures prices are transparent, and are available on the internet and a host of other media sources.
All Physical trade in oil is through 'contract arrangements' that are formal contracts drawn up between the buyer and the seller for a specified quantity and quality of oil delivered at a fixed place and time and at a fixed price. Usually the spot and futures prices benchmark the contract price, to explain, the delivered price of the oil depends upon the spot market at the agreed time of delivery plus or minus an agreed amount depending upon the other conditions of the contract, such as credit terms, quantity and quality. In the US, some sale of the domestic production of oil is at a 'Posted Price', a different method of pricing of the indigenous product (Transactions).
Futures prices of crude are $ 69.59 per barrel for May 2006 delivery and $ 70.22 per barrel, for June delivery. These are the closing prices of May 8th trading on the NYMEX for Brent crude (Trading Quotes).
2. Some oil producing nations have formed a cartel to control the production, shipments and prices of crude. This organisation called the Organisation of Petroleum Exporting Countries (OPEC). Appendix-1 shows the countries that form part of OPEC and their average production over the past three years (2003-05). Appendix-2 provides details of countries that produce significant quantities of crude but who are no a part of the OPEC and their average production over the past three years (2003-05). Appendix 3 gives details of the major Exporters, Consumers and Importers of Oil (International Petroleum Monthly). Saudi Arabia, Russia, Iran and North Sea operations are the major producers of oil. The US is the largest consumer and importer of oil followed by China and Japan.
3. The world oil market is a Homogenous Co-operative Oligopoly. A broad definition of an oligopoly is a 'monopoly of many'. "The distinguishing characteristic of an oligopoly is that there are a few mutually interdependent firms that produce either identical products (homogeneous oligopoly) or heterogeneous products (differentiated oligopoly)" (Bookrags). Oil has no substitute. The consumer, has no alternative for the product, has no way of increasing total utility and with the supply and prices being controlled by a handful of suppliers has absolutely no way of influencing prices. This is a classic case of a monopolistic market. As is evident from the figure presented in Appendix 3, the largest exporters in the world, other than Russia, Norway, Mexico, Kazakhstan, and Qatar, are a part of the OPEC. The OPEC decides upon the levels of production and exports all with a view to control prices by maintaining a scarcity in the market. The non-availability of natural resources restricts entry of new players into the market. Since the product of all the players is essentially the same - crude petroleum oil, with only small variations in quality, the term Homogenous Oligopoly applies perfectly to this ...Show more

Summary

1. All petroleum crude (oil) purchased or sold in the world is traded in three basic ways Spot Trading, Futures Market, and Contract arrangement. Spot transactions are on-the-spot agreements to buy or sell a single shipment at an agreed price. Since suppliers and buyers use these to bridge short-term gaps between supply and demand, spot market prices are good indicators of the supply and demand situation, rising prices indicating shortage and vice versa.
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