This weekend, my dad gave me a crash course presentation on the oil markets. He gave me a quick introduction to the supply chain of oil, from when it is extracted, until when it is either sold and stored. He also showed me about futures contracts and explained the concept of storing oil, and how certain suppliers need to hire external firms to store their oil. Here are some of the main takeaways from the presentation:

1)Basic understanding of futures contracts:
– trades on an exchange to avoid credit and performance risk on the parties to the contract
Standardized grade/quality of the commodity
standardized settlement date
standardized quantity

2) What the key oil benchmarks are:
Brent
WTI
Dubai light
These are light sweet crude oils with API great than 10 and sulphur content lower than 0.5%

3) How physical oil is bought and sold using futures:
Physical oil is characterized by many different grades (light / heavy/sweet/sour) and locations. The price set references one of the above benchmarks and a discount or premium is added to the benchmark when the final quality is known.

4) What are the key drivers of oil demand:
Supply – recall balance of trade, as well as the US, having grown to the largest producer
Demand – how COVID destroyed demand for jet fuel/diesel/petrol, thus causing the price for oil to essentially go negative
Geo-Political developments, such as the oil agreement between India and the middle east, thus causing them to sell oil through a middle man, which can have its own set of benefits and drawbacks

5) How that demand was destroyed during COVID:
Planes/Trains/Ships/Automobiles are all on standby now because people are not going anywhere during the glocal lockdown. This caused massive demand destruction for oil. This meant that the people who are producing the oil don’t have anyone to sell it to. This leads to a chain reaction of consumers asking for lower and lower prices of oil and produces accepting to them until the price of oil produced and the price of oil sold became equal. Then what happened is that storage firms were actually asking the oil producers to pay them for storing their oil, as producers had to keep producing oil due to the nature of the oil pipelines and technologies that they used, so this caused the price of oil to be negative.

Overall, this was an etremely interesting presentation/talk that my dad gave me and really does show how the world operates, and how something like COVID can cause so many problems for everyone involved in business, especially businesses regarding the oil market. This was extremely insightful, and this knowledge is definitely something that I am going to keep with me for the rest of my life and use to my advantage in the future because this is knowledge is something that my dad finds himself teaching his interns, so if I know this before even going into the workforce, if I choose to go down this path, this will be a major advantage for me, and will surely make me stand out among my peers.

Here is the link to the presentation slides: International Oil Markets Overview