PROJECT

ON

CRUDE OIL COMMODITY

Submitted By:
-Anagha Chavan
-Swapnil More
-Rohan Poojari
-Aditi Waghmare
-Deepali Gangawane

INDEX
SR No.

Contents

Page No.

1.

Industry Overview

3-4

2.

Indian Crude Oil Consumption

5-6

3.

Indian Crude Oil Production

7-8

4.

Trend Analysis

5.

Government subsidy for crude oil in India

10

Factors influencing price of Crude Oil

7.

Current Scenario

13

8.

Contract Specification

14

11-12

INDUSTRY OVERVIEW
INTRODUCTION:
Oil is the single most important commodity that holds the position of a key factor in each
and every economy of the world. The worlds richest nations are at their current positions
just because of the oil factor. The importance of oil has reached such a level at which
there is no country in the world, which doesnt need oil and its by-products, and if
somehow it doesnt have much reserves of oil to meet their domestic demand, these
nations are ready to import the product at any cost. Many nations have a huge share of
their earnings constituted by oil exports only. Every industry requires oil to function
properly either directly or indirectly as both crude oil and its by-products serve as their
inputs. Crude oil holds importance as input to the global growth engine since it is the
most important source of energy accounting for more than two fifth of the global energy
consumption. Crude oil dominates the total energy supply with 33% share.

The value of crude oil is entirely determined by the petroleum products (such as gasoline)
which are derived through refining crude and its use as a feedstock for production of
petrochemical products such as fertilizer and PVC. Crude oil is refined to make
petroleum products grouped under three categories: light distillates (liquefied petroleum
gas, gasoline/petrol), middle distillates (kerosene, diesel) and heavy distillates (heavy fuel
oil, lubricating oil, wax)
VALUE CHAIN:
3

The primary characteristics studied while evaluating crude oil quality are the following. I.
API (American Petroleum Institute) gravity is a measure of how heavy or light crude oil
is compared to water. The higher the API, the lighter is crude and yields more refined
products. II. Sulphur Lower the sulphur, sweeter is crude. Sweet crude yields higher
value petroleum products such as gasoline. Therefore light sweet crude oil yields higher
proportion of superior quality of petroleum products such as gasoline than heavy and sour
variety of crude and are traded at a premium. Crude oil is classified into 161 varieties
based on their API gravity and sulphur content (Figure 3). The prominent 'benchmark'
varieties of crude oil are Brent Crude Oil and Light Sweet Crude Oil (WTI) which are
traded extensively in the global futures market.
Exchanges dealing in Crude Oil:

National Commodities & Derivatives Exchange (NCDEX)

The New York Mercantile Exchange (NYMEX)

The International Petroleum Exchange of London (IPE)

The Tokyo Commodity Exchange (TOCOM)

INDIA CRUDE OIL CONSUMPTION:

Supply of crude oil is not responsive to change in prices in the short run improving only
in the long run. The only way supplies can increase in short run is drawing down on
strategic reserves. However elevated prices for a long period can spur exploratory activity
leading to jump in supplies in the long run. Proven reserves of crude are an indicator of
quantum of supply of crude oil. Crude oil reserves meet the criteria of proven reserves if
they are feasible commercially to extract given the state of technology. As of 2009, about
77% of proven reserves were with OPEC lead by Saudi Arabia which holds 19% of the
global proven reserves. Russia leads the non-OPEC group with 6% of global proven
reserves.
Yea Consumptio
Change
r
n
200
2,147.44
0

5.72 %

200
2,263.73
1

5.42 %

200
2,333.44
2

3.08 %

200
2,426.33
3

3.98 %

200
2,571.55
4

5.99 %

200
2,550.25
5

-0.83 %

200
2,701.63
6

5.94 %

200
2,888.06
7

6.90 %

200
2,957.30
8

2.40 %

200
3,067.78
9

3.74 %

201
3,115.45
0

1.55 %

2011 3,280.98

5.31 %
5

201
3,450.00
2

5.15 %

201
3,509.00
3

1.71 %

INDIA CRUDE OIL PRODUCTION:

We are dependent on crude oil in modern society, but where exactly does it come from?
We can find oil supplies just about everywhere in the world, but some areas are more
abundant than others. Countries in the Middle East, including Saudi Arabia, Russia,
Iraq, Iran and others, have massive supplies of oil and are the world's leading oil
exporters. Major countries that export Crude Oil are;

Rank
1
2
3
4
5
6
7
8
9
10

Country
SAUDI ARABIA
RUSSIA
UNITED
ARAB
EMIRATES
IRAQ
NIGERIA
ANGOLA
CANADA
VENEZUELA
KAZAKHSTAN
KUWAIT

BBL/DAY
6,880,000
4,625,000
2,500,000
2,390,000
2,341,000
1,928,000
1,756,000
1,645,000
1,406,000
1,395,000

Oil is made of compressed hydrocarbons, the remains of prehistoric (ancient) animals and
plants placed under extreme pressures and temperatures in the Earth's crust.
Hydrocarbons take many forms, including coal, natural gas, crude oil and even diamonds.
Another thing to remember about crude oil and fossil fuels is that they are a nonrenewable source of energy. This means that the world is slowly but surely running out of
its supply of oil, and once it's gone, it's gone.

Supply of crude oil is not responsive to change in prices in the short run improving only
in the long run. The only way supplies can increase in short run is drawing down on
strategic reserves. However elevated prices for a long period can spur exploratory activity
leading to jump in supplies in the long run. Proven reserves of crude are an indicator of
quantum of supply of crude oil. Crude oil reserves meet the criteria of proven reserves if
they are feasible commercially to extract given the state of technology. As of 2009, about
77% of proven reserves were with OPEC lead by Saudi Arabia which holds 19% of the
global proven reserves. Russia leads the non-OPEC group with 6% of global proven
reserves

Production of Crude oil last years are;

Year

Production

Change

2000

646.34

-0.97 %

2001

642.40

-0.61 %

2002

664.75

3.48 %

2003

660.03

-0.71 %

2004

683.11

3.50 %

2005

664.66

-2.70 %

2006

688.61

3.60 %

2007

697.53

1.30 %

2008

693.71

-0.55 %

2009

680.43

-1.91 %

2010

751.30

10.42 %

2011

782.34

4.13 %

2012

776.97

-0.69 %

2013

772.08

-0.63 %

TREND ANALYSIS OF SPOT & FUTURE PRICES OF CRUDE OIL

From the above chart of 5 years we can observe that from the year 2010 till 2014 the
market was Contango for Crude Oil because in each year mentioned above the future
prices are greater than the spot prices.
In the year 2015 the market switched from Contango to Backwardation because there
was huge supply of crude oil as compared to low demand.

GOVERNMENT SUBSIDY FOR CRUDE OIL IN INDIA

The Indian basket of crude oil price has plummeted to $54.41 per barrel, its lowest in four
months, on the back of multiple factors, including a contraction in the manufacturing
sector in China, the worlds second-largest consumer of crude after the US. A stronger US
dollar has also made non-US investors to sell commodities, pressuring prices already
impacted by the global oversupply concerns from the just-concluded Iranian nuclear deal.
The Indian basket represents the average price of Oman and Dubai sour grade crude and
the sweet Brent crude oil processed in Indian refineries in the ratio of 72:28. It stood at
$54.41 per barrel on the last trading day of July 24, falling from a peak of $66.54 per
barrel on May 6, and the lowest since April 2 price of $54.77 per barrel.
The government had budgeted for an average crude price of $70 per barrel for this
financial year. If the average price of $60 per barrel in the first four months (April-July)
is sustained, we are looking at Rs 65,000 crore savings in import bill for companies, and
around Rs 9,000 crore savings in the subsidy bill for the government,
Currently, every $1 decrease in crude prices pulls down import bill by Rs 6,500 crore and
the governments subsidy burden by Rs 900 crore. However, the benefit would be limited
by the ongoing depreciation in rupee value. The Indian currency on Monday fell to a sixweek low closing at Rs 64.17 against the dollar. Currently, every Rs 1 increase in the
exchange rate of dollar increases oil import bill by Rs 7,455 crore, according to
Petroleum Planning and Analysis Cell (PPAC), an arm of the oil ministry.

10

FACTORS THAT INFLUENCE CRUDE OIL PRICES

Oil prices are determined by commodities traders who bid on oil futures contracts in the
commodities market. These contracts are agreements to buy or sell oil at a specific date in
the future for an agreed-upon price. They are executed on the floor of a commodity
exchange by traders who are registered with the Commodities Futures Trading
Commission. Commodities have been traded for more than 100 years, and have been
regulated by the CFTC since the 1920s.
Commodities traders fall into two categories. Most are representatives of companies who
actually use oil. They buy oil for delivery at a future date at the fixed price. That way,
they know the price of the oil, can plan for it financially, and therefore reduce (or hedge)
the risk to their corporations. Traders in the second category are actual speculators. Their
only motive is to make money from changes in the price of oil.
Factors that Determine Crude Oil Prices:

1. OPEC output & supply:

OPEC stands for Organization of Petroleum Exporting Countries. It is an organization
of eleven developing countries that are heavily dependent on oil revenues as their main
source of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC controls
almost 40 percent of the worlds crude oil. It accounts for about 75% of the worlds
proven oil reserves. Its exports represent 55% of the oil traded internationally.

2. Weather Conditions:
Like most commodities, seasonal changes in weather affects the demand for oil. In the
winter, more heating oil is consumed, and in the summer, people drive more and use
more gasoline. Extreme weather conditions (hurricanes, tornadoes, thunderstorms) can
physically affect production facilities and infrastructure disrupting the supply of oil and
induce pricing spikes.

3. Political Unrest :
11

If an oil-rich area becomes politically unstable, supplier markets react by bidding up the
price of oil so that supplies are still available to the highest bidder. In this instance, only
the perception of a shortage in supply can increase prices, even while production levels
remains constant.
4. Dollar fluctuations :
The most important currency in the world today. Most of the trade in oil is invoiced in US
Dollar. Whenever India buys oil from Iran, natural gas from Russia and electronics from
China, we do not pay them in Rial, Rouble or Yuan, we pay them in Dollars. Dollar
Rupee exchange rate is thus very important for both imports and export competitiveness.
It goes high, consumers suffer, it goes low exporters suffer.
5. Refinery fires & funds buying:
Oil refiners are major polluters, consuming large amounts of energy and water, producing
large quantities of wastewaters, releasing hazardous gases into the atmosphere and
generating solid waste that are difficult both to treat and to dispose of.
6. Restrictive Legislation :
As the majority of the worlds oil reserves and production are controlled by governmentrun companies, the global oil market is heavily politicized and its functioning is far from
that of a competitive market. Energy policies and taxes in oil-rich countries also affect
the price of oil. If a government bans oil exploration in a place with proven reserves,
such as the Gulf of Mexico, then commodity markets mark this as a loss in crude oil
supply and gas prices go up as a result.

12

CURRENT INDIAN SCENARIO

1. India ranks among the top 10 largest oil-consuming countries. The countrys total
oil consumption is about 2.2 million barrels per day.
2. India faces a large supply deficit, as domestic oil production is unlikely to keep
pace with demand. Indias rough production was only 0.8 million barrels per day.
3. Government has permitted foreign participation in oil exploration, an activity
restricted earlier to state owned entities.
4. Indian government in 2002 officially ended the Administered Pricing Mechanism
(APM). Now crude price is having a high correlation with the international market
price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%
keeping in line with international crude price, subject to certain government laid
down norms/ formulae.
5. Disinvestment/restructuring of public sector units and complete deregulation of
Indian retail petroleum products sector is under way.
6. The energy efficiency and investment in renewable energy such as Solar has
permanently reduced demand for oil in most of the developed world or country.

13