Oil Market Basics- Getting Fundamental

The world has witnessed the oil prices display sharp volatility throughout the year of 2008. Reaching a record high of over $147 per barrel during the early part of the year and then falling sharply to just over $90 per barrel, having a destabilizing effect on the underlying market could not be ruled out. The main purpose of this article is to get you familiar with the basics of oil market.

According to some analysts, the trends in oil market can no longer be simply governed through supply and demand. Oil investor behavior is going to be another strong factor in the oil price behavior. Energy analysts comment that speculative investments from financial firms contributed to the high price in early 2008. Followed by a sell off, this accelerated the financial market woes set in by late summer.

A more diverse set of investors, hedge funds, pension funds, and investment banks, leads to an increased speculative behavior. This has made it difficult to predict the oil-market trends. It is a debatable issue if supply and demand remain the main factors determining oil prices. It has been also argued that the failure of industry analysts to adapt to new realities should not be blamed on investors.

But most analysts agree that gone are the days when the Organization of the Petroleum Exporting Countries (OPEC) could virtually dictate oil prices. Today, the oil market behaves more than ever like other commodities markets.

Today, crude oil or petroleum is the world's most actively traded commodity. Although the largest oil markets being in London, New York and Singapore, crude oil and refined products are bought and sold all over the world.

In “futures contract” in oil market, the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specified location. The minimum purchase is 1,000 barrels.

With so many different varieties and grades of crude oil present, buyers and sellers commonly refer to a limited number of benchmark crude oils. Brent is generally accepted to be the world benchmark and is used to price two thirds of the world's internationally traded crude oil supplies.

US benchmark and Opec basket are the other well known accepted benchmarks for trading oil. However, if supplies became extremely limited and price swings became exaggerated, a new benchmark would have to be found.

Your introduction to oil market ends here with providing you an initial insight into the world of oil markets.

left quote Today, a skilled manager makes more than the owner. And owners fight each other to get the skilled managers. right quote

— Mikhail Khodorkovsky.