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19 November 2015

The Story of Oil - a video from CME Group

On CIMB's website, there is a link to an educational website known as "Futures Fundamentals", run by CME Group. While I may not know much about the group, I found that this video, "The Story of Oil", is quite good. It comes from an article, "Gas Prices Explained."



Aside from this nice video about oil, there's also a cool infographic about how oil prices are affected. It deals with the different stages of oil production, namely:

  1. Extraction
  2. Transportation
  3. Exchange
  4. Refinement
  5. Gas Station

These are quite new to me, but no doubt, they are nothing new to those in the oil and gas industry. Maybe some of you kind souls out there can point me in the right direction so that I can understand more about each stage. Oil is such an important thing, many of our industries rely on it: logistics, industry, energy, plastics, etc.

I found it interesting that the website, "Futures Fundamentals", has many articles on futures. While I don't trade in futures, the concept of futures is also one that is quite intriguing. Buying something tomorrow, at today's prices: that's the basic concept. One of the other articles on "Futures Fundamentals" on "Why futures matter to you", says:
"Airlines can more accurately predict their fuel costs. So you can find better prices and options when you’re looking for a flight." 

I suppose, that's how airlines are able to offer you prices for flights half a year in the future, when they cannot possibly know what the price of oil will be half a year down the road.

Now, just as much as I'm not an expert on oil, I'm also not an expert on futures. But here's what one article from Marketwatch.com, "What do futures really tell us?" says.

"Futures essentially give investors a preview of what’s likely to happen when the U.S. stock markets open ...  The price of a stock-index future is generally very close to the price of the actual index, and because these futures start trading before the stock market opens, they give an early indication of what should happen when it does..."
Another interesting article in The Telegraph from 2008 explains what oil futures are, and how they are traded. Among the salient points of the article:

  • Futures contracts take place in an exchange.
  • You need to be a member of an exchange to trade futures.
  • Members can also trade for hedgers or speculators.
  • Trading houses regulate the exchanges and protect both parties as a "middleman"
  • Trading houses establish the rules of the trade, including margin levels, default rules, settling individual positions.
  • Participants in trading houses initially pay only a fraction of the amount being traded.
  • At the end of the day, the costs of the trade are charged to the participants, taking into consideration any profit made or losses sustained since the time of the trade.
  • On the settlement date, or the expiry of the futures contract, the oil is either physically delivered to the buyer, or there is a cash settlement.
  • However, physical delivery of commodity futures is rare. 
  • Market participants can also settle their obligations before the expiry date.

I don't understand everything that I read, but it sounds like there is a lot of money going on there, and a commodities futures trader could be making a lot of money. It is a potentially more lucrative business than mining for oil (which could cause losses if the oil wells dug up do not have oil). It might be worth learning up.

Links: 


  • http://futuresfundamentals.cmegroup.com/impact-gas-prices-explained.html
  • http://futuresfundamentals.cmegroup.com/basics-why-do-futures-matter.html
  • http://blogs.marketwatch.com/realtimeadvice/2011/08/11/what-do-futures-really-tell-us/
  • http://www.telegraph.co.uk/finance/newsbysector/energy/2790647/Oil-price-QandA-What-are-oil-futures-and-how-are-they-traded.html

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