Brent Oil – Commodity

Instrument description

The commodity market is one of the largest and diverse financial markets. The most dominant of the commodity is considered to be oil, which is used for everyday purposes, and most important is in the energy and transportation sector. Crude oil is the name given to the naturally occurring unrefined oil, which is refined and then used as diesel, gasoline, jet fuel, and other types of petrochemicals. Crude oil is a non-renewable natural resource, which means it is present on Earth in a finite capacity and cannot be replaced.

Economists suggest that crude oil is one of the most important commodity in the world and a primary source that fulfills the energy demands of the entire world. Crude oil is also referred to as ‘Black Gold’ due to its importance and value. Crude oil is seen as a global commodity and can be traded through derivative contracts and futures contracts.

Crude oil is extracted through drilling and found alongside other natural resources such as gas. Crude oil is a fossil fuel made up of hydrocarbons, other organic compounds, and with traces of metal. The crude oil is extracted all across the world, but the value of oil is determined through its characteristics such as density, consistency, and how and where the crude oil is extracted. One of the essential elements that are considered in the crude oil is sulfur that is sweet or sour, and its density varies from heavy to light.

History of Brent Crude Oil

There are over 150 types of crude oil that trades on the market, but the two most popular types and considered benchmark for crude oil in global markets are Brent Crude Oil and West Texas Intermediate (WTI) that are exchanged on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX).

Brent Crude oil is extracted from the North Sea coasts between England and Norway and said to be the most vital benchmark that determines the oil prices all across the globe. The Brent Crude oil is usually light and low sulfur oil type. The Brent Crude oil is drilled from oilfields of Brent, Forties, Oseberg, and Ekofisk in the North Sea and also termed as BFOE quotation. The characteristic of Brent Crude oil is light and sweet, which is why it is preferred over heavy and sweet crude oil. Another advantage of Brent Crude oil is that it can easily be converted to diesel and gasoline. The Brent Crude oil can also easily be supplied through pipelines while the heavy crude oil is not easily transported along pipelines due to the movement of oil flow.

The term ‘Brent’ is derived from Brent Oilfield in Scotland, which was the first place where the oil blend or mix was produced. The U.K. oil industry started naming the standards of oilfields in 1976, and their method was to name the fields after birds and in alphabetical order. The first field in the list was named ‘Auk’ after the Great Auk Penguin, and the second field was called Brent after the Brent Goose. As Brent crude is drilled and mined from the North Sea, the production and transportation costs are quite low. The Brent Crude is now sourced by U.K., Norway, Germany, Denmark, and Netherlands.

The Brent Crude oil can get a premium price for oil, and according to statistics, nearly 60% or two-thirds of the oil in the international market is priced relative to Brent Crude oil. Brent Crude oil is mostly refined in Northwest Europe, and it is also a major oil type used in Europe and Africa. The Brent Crude oil is traded in the ICE Europe Exchange with a contract unit equal to 10000 barrels of oil and minimum fluctuation of one cent per barrel. The Brent Crude oil is quoted in U.S Dollars per barrel.

The Brent Crude oil was initially traded in London International Petroleum Exchange but then moved to ICE in 2005 when trading activities were digitized, and electronic trading became common. The Brent Crude oil is traded in ICE with ticker (ICE: B) and also on NYMEX with ticker (NYMEX: B.Z.).

In the early 2000s, Brent Crude oil was trading at a barrel price of $40, but as oil demand became high in emerging Asian markets, then the Brent Crude oil gain momentum and traded at an all-time high value of $146.29 per barrel in July 2008. But the Global Recession from the end of 2007 to 2008 saw a significant fall in the oil prices, and the $100 increase in value per barrel was lost, and Brent Crude oil closed at the year with $40.15 per barrel.

The European oil market did recover from the economic crisis, and the Brent Crude oil closed at $100 and $120 for the following two years. In 2014, another oil crisis developed when OPEC (Organization of Petrol Exporting Countries), which consists of 14 oil-producing nations, refused to slow down oil production, and the Brent Crude oil price fell below $40 in 2016. The Brent Crude oil again increased in value and traded above $80 per barrel, but the spread of Coronavirus in 2020 caused the Brent Crude oil to lose value along with other oil markets of the world as demand is low all over the world.

• Difference between Brent Crude oil and WTI oil

The Brent Crude oil and WTI oil are two of the most prominent and commonly traded types of crude oil that dominate the oil markets in the world. Both the Brent Crude oil and WTI oil are sweet and light, suitable for gasoline production, and valued in U.S Dollars. However, there are some very distinct difference between the Brent Crude oil and WTI oil which includes
🗸 Extraction location: Brent crude oil is extracted in the North Sea while WTI oil extracted in U.S Midwest
🗸 Composition: Brent crude oil has sulfur content 0.37%, while WTI oil has a sulfur content of 0.24%.
🗸 Prices: Brent Crude oil is a global benchmark and maintains a higher value as compared to WTI oil. The Brent Crude oil currently trades at $42.89/barrel while the WTI oil is $40.41/barrel
🗸 Trading Exchange: The Brent Crude oil Future contracts are traded in ICE Europe while the Future Contracts of WTI oil are exchanged in NYMEX.

The price difference between the Brent Crude oil and WTI oil is due to a variety of reasons such as extraction and transportation methods and cost, inventory numbers, supply and demand, physical difference in composition of crude oil, refining methods, and geopolitical events such as political imbalance and natural calamities.

Supply and demand of Brent Crude Oil

The crude oil is the primary source of energy, which makes it a highly traded, constantly demanded, and very liquid commodity. The fundamental principle of supply and demand in economics plays a crucial role in determining the value of Brent Crude oil. The supply and demand rule works in two ways that suggest

1. The price of Brent Crude oil will rise when there is an increase in demand and shortage in supply
2. The price of Brent Crude oil will fall when there is a decrease in demand and increase in supply

The crude oil is an essential commodity as it is used as an energy source in various sectors of the market. For instance, crude oil is necessary to provide fuel for cars, buses, planes, and trains.

How to read the price change of Brent Crude Oil

If we analyze the Brent Crude oil chart, we see the Index trades in a stable way and from the range of $55.00 to $70.00 per barrel from July 2019 to the last week of February 2020. The Brent Crude oil recorded the highest value of $70.00/barrel on January 6, 2020. There is a sudden drop in the price of Brent Crude oil since the last week of February, and the Brent Crude oil traded at the lowest value of $18.85 on April 21, 2020. There have been constant fluctuations since March, and Brent Crude oil currently trades at $43.36/barrel. The Bid price is $43.45, while the Ask price is $43.33.

How to trade Brent Crude Oil

The Brent Crude Oil can be traded from Monday to Friday from 00:00 to 21:00 (GMT), and popular means of trading includes Futures contracts, Contract for Difference (CFD), Exchange Traded Funds (ETFs), and trading stocks of oil and gas companies. The Futures contract is ideal for long term investors, while CFDs and spread bets are best for short term traders. The many reasons to trade in Brent Crude Oil are

• Diversifies the investment portfolio and
• Investing in oil may be beneficial as in economic uncertainty; the oil retains its value.
• The value of oil is not dependent on currencies and oil will hold its value during inflation
• The oil market is quite volatile with frequent swings and trader can benefit by speculating the price movements correctly.

One way to trade Brent Crude Oil is through CFDs, which is a contract that allows you to potentially profit by correctly speculating the price difference of the underlying asset from opening to closing of the trade. Many of the brokers allow traders to speculate on the price of oil futures contracts, but the contract sizes are smaller (25 barrels) as compared to standard oil future contracts, which can be (1000 barrels).

Trading with CFDs gives you the advantage of using leverage and going both long and short when trading positions. For instance, with a leverage of 1:10 you want to trade CFDs $2000 worth of Brent Crude oil; then, you would need initial capital of $200 to start the trade. There is a chance of magnifying your profits and losses with through leveraged CFDs. However, the oil prices are quite volatile, and one should trade carefully and apply a risk management strategy to avoid any significant losses.

Another popular and common way of trying to maximize profit is by trading shares of global oil companies such as British Petroleum (B.P.), Royal Dutch Shell, Total, and ExxonMobil. All the oil companies have high valued shares that can give good dividends to the shareholders.

What causes the price change of Brent Crude Oil?

The two important factors that play a major role in determining the current value and future direction of Brent Crude oil prices are economic factors and geopolitical factors. When there is a global economic crisis, then it limits the industrial and individual use of oil, and there is a noticeable decrease in demand, which reduces the crude oil prices per barrel. But when there is economic growth, then demand of crude oil increases, and so does the price per barrel.

The geopolitical factors are a major force that determines the price of crude oil. Political unrest in the oil-producing region of Asia can affect the production of oil. The policies and decisions of OPEC directly impact the price of Brent Crude oil. If the supplies are limited and controlled, then the price of Brent Crude oil is said to rise.

Unlike other financial markets, the traders and investors need to form a well-defined strategy when trading in a commodity such as oil and take help from fundamental and technical analysis before investing in Brent Crude oil. The price of oil is sensitive to global news and event, and traders should monitor the news regularly as the news directly influences the oil prices in global markets.

The value of the U.S Dollar should also be watched along with the conversion of U.S Dollar with other global currencies as oil is valued in U.S Dollars. If the USD weakens, then oil prices will rise, and if the USD strengthens, then the oil prices will fall.

Natural weather events and climate change also impact crude oil prices. If a hurricane or earthquake hits the key oil refinery, then the prices of crude oil will increase as supply will be affected. The current prevailing Covid-19 outbreak has also led to a decrease in energy requirements. The crude oil prices are regularly falling as there is increased supply but less demand.

When trading in Brent Crude oil, the traders and investors should also watch for U.S inventory numbers that set the tone of oil prices in global markets. A high inventory level means less demand for oil and lower oil prices in the international market. Similarly, a low inventory level would suggest an upcoming surge in demand for oil and a rise in oil prices. The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.