PROJECT

ON

CRUDE OIL COMMODITY

Submitted By:

-Anagha Chavan

-Swapnil More

-Rohan Poojari

-Aditi Waghmare

-Deepali Gangawane

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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 9

5. Government subsidy for crude oil in India 10

6 Factors influencing price of Crude Oil 11-12

7. Current Scenario 13

8. Contract Specification 14

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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 world’s 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 doesn’t need oil and its by-products, and if somehow it doesn’t 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)

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VALUE CHAIN:

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)

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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.

Year Consumption Change

2000 2,147.44 5.72 %

2001 2,263.73 5.42 %

2002 2,333.44 3.08 %

2003 2,426.33 3.98 %

2004 2,571.55 5.99 %

2005 2,550.25 -0.83 %

2006 2,701.63 5.94 %

2007 2,888.06 6.90 %

2008 2,957.30 2.40 %

2009 3,067.78 3.74 %

2010 3,115.45 1.55 %

2011 3,280.98 5.31 %

2012 3,450.00 5.15 %

2013 3,509.00 1.71 %

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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 Country BBL/DAY1 SAUDI ARABIA 6,880,0002 RUSSIA 4,625,000

3UNITED ARAB EMIRATES 2,500,000

4 IRAQ 2,390,0005 NIGERIA 2,341,0006 ANGOLA 1,928,0007 CANADA 1,756,0008 VENEZUELA 1,645,0009 KAZAKHSTAN 1,406,00010 KUWAIT 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 non-renewable 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

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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 %

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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 INDIAThe 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 world’s 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.

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“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 government’s 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 six-week 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.

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)

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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 world’s crude oil. It accounts for about 75% of the world’s 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 : 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 :

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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 world’s oil reserves and production are controlled by government-run 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.

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CURRENT INDIAN SCENARIO

1. India ranks among the top 10 largest oil-consuming countries. The country’s 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. India’s 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.

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