COMMERCE IN THE CRUDE OIL MARKET

• Jurisdiction: United States

Federal & Indian Oil & Gas Royalty Valuation and Management II
(Feb 1998)
CHAPTER 7B
COMMERCE IN THE CRUDE OIL MARKET
Robert A. Levin
New York Mercantile Exchange
New York, New York

HISTORICAL COMMERCIAL HIGHLIGHTS IN CRUDE OIL

• I) NON-COMPETITIVE FOR DECADES

A) TEXAS RAILROAD COMMISSION CONTROL OVER TEXAS PRODUCTION — DOMINATED PRICING THRU THE 1950S

B) MULTINATIONAL CARTEL — DOMINATED PRICING DURING THE MID 1950S THRU 1973

C) OPEC —

1) DOMINATED PRICING FOR A DECADE

2) CONTINUES TO WAGE STRONG INFLUENCE

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• II) COMPETITIVE PRICING

A) US WELL-HEAD DEREGULATION ENDS JANUARY 1981

B) PRECEDING, DURING 1970S, SUBSTANTIAL REGULATION

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• III) COMPETITIVE TRANSACTIONS — ORAL TRADITION

A) TRADING OF "SPOT" CARGOS INCREASES

B) CASH-TRADING INSTITUTIONS EVOLVE TO ACCOMMODATE "SPOT" BARRELS

C) BRENT FORWARDS

1) 75% OF OIL WAS REFINED BY AN EQUITY PRODUCER

2) TAX SPINNING

D) WTI — PRICE CONTROL INFLUENCE (SIMILAR RELATION BETWEEN PRODUCTION GATHERING AND REFINING)

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• IV) CASH TRADING "INSTRUMENTS" STRUCTURE

A) STANDARD PRODUCT: I.E. PIPELINE COMMON STREAM

B) STANDARD DELIVERY PERIOD; I.E. CALENDAR MONTH (RATABLE)

C) STANDARD DELIVERY LOCATION: I.E. PIPELINE TERMINAL FACILITY

D) STANDARD DELIVERY PREPARATIONS: I.E. PIPELINE POLICIES

E) CREDIT WORTHINESS IS SUBJECTIVE (THRU PRACTICE DE FACTO STANDARDIZED)

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• V) CASH TRADING "INSTRUMENTS" (CRUDE OIL)

A) INTERNATIONAL

1) BRENT

2) DUBAI

3) OMAN

4) TAPIS

B) NORTH AMERICAN

1) WTI

2) WTS

3) LLS

4) ANS (DISCONTINUED)

5) PIPELINE DELIVERED GULF COAST SOUR?

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• VI) BREADTH OF MARKET

A) TURNOVER WELL IN EXCESS OF PRODUCTION/CONSUMPTION

B) HUNDREDS OF PARTICIPANTS (DOZENS EXTREMELY ACTIVE)

C) CASH-MARKET PHYSICAL DELIVERY RESEMBLES "PAPER"

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• VII) COMMERCIAL MARKET DELIVERY VS PHYSICAL OPERATIONS

A) COMMERCIAL DELIVERY IN PIPELINE IS FLOW OVER A TIME PERIOD VS. BATCH OPERATION

B) BUYERS SCHEDULE OFTEN INDEPENDENT OF SELLERS

C) PIPELINE OPERATORS PERFORM CLEARINGHOUSE FUNCTION

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• VIII) OTHER COMMERCIAL INSTRUMENTS

A) FUTURES

B) OTC DERIVATIVES

1) SYNTHESIZED FORWARD SALES/PURCHASES

2) CUSTOMIZED RISK MANAGEMENT

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• IX) FUTURES

A) RISK MANAGEMENT

B) PRICE DISCOVERY AND TRANSPARENCY

C) STANDARDIZED FORWARD OBLIGATIONS

D) OVERLAY CASH-MARKET PRACTICES

E) REGULATED BY US CFTC; TRADED ON DESIGNATED CONTRACTS MARKETS

F) REGULATED CLEARINGHOUSE

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• X) NYMEX OIL...