Light Sweet Crude Oil: The Driver of Global Commodity Markets

Light Sweet Crude Oil is the most heavily traded commodity in the world. The price of Light Sweet Crude Oil has a profound impact on nearly all other commodities, including Gold, Silver, Copper, Corn, Sugar and Wheat.

The light sweet crude oil grade is given its name because of the very low concentration of sulfur, less than 0.5%, which is in sharp contrast to the heavier sour crude with relatively high sulfur content.

A number of countries produce light sweet crude, including the US where it is called West Texas Intermediate (WTI) and the UK where Brent Crude is produced.

Other light crudes can be found in countries as diverse as Angola, Canada, Indonesia, and Norway.

Both the WTI and Brent grades are widely recognized and are used as benchmarks for the price of crude oil.

In fact, Brent crude is used to price about two-thirds of globally traded crude, so is a truly world benchmark.

Of course, the volume of the Saudi crudes is much higher than the Brent grade, and in the Gulf another benchmark is used, the Dubai crude, which is one of the few Gulf crudes available at spot price.

When the crude oil price is quoted in the media it refers to the cost of delivering a barrel of WTI to Cushing, Oklahoma in the forthcoming month.

Futures contracts can be traded for WTI on NYMEX in New York and for the Brent benchmark on the ICE in London.

The main uses of high quality, low sulfur light sweet crude is for processing into:

Gasoline or petroleum spirit (petrol), which is produced by distillation of petroleum in an oil refinery. More volatile than diesel or kerosene, it is generally a mixture of the C6-C12 hydrocarbons.

The gasoline will be composed of various streams or blends which themselves have variations in the type and size of hydrocarbon (whether alkane, alkene, or aromatic).

This determines the grade or octane rating which is a measure of the resistance of the gasoline to knocking.

As part of the petroleum universe, it is possible to trade a futures contract called RBOB (Reformulated gasoline blendstock for oxygen blending) on NYMEX.

Kerosene or paraffin oil, which is a combustible, clear hydrocarbon liquid in the C12-C15 chain length, is produced by fractional distillation of petroleum between 150 and 275 degrees centigrade.

This derivative is used in jet engine fuel and for cooking fuel in portable cookers and as heating oil in houses.

Petro diesel, which is a hydrocarbon liquid distilled from crude oil between 200 and 350 degrees centigrade.

A more dense liquid and easier to refine than gasoline, diesel also releases more energy per gallon. As light sweet crude oil has a low sulfur content it also provides a good source of ultra-low sulfur diesel (ULSD).

Traders can get exposure to diesel using a futures contract traded on NYMEX.

How else is it possible to get exposure to light sweet crude and its derivatives on commodity markets?

Apart from the futures contracts mentioned above for WTI and Brent and for RBOB and diesel, the alternative could be through using exchange-traded funds (ETFs) or more specifically, exchange-traded commodities (ETCs).

It is possible to invest in an ETC which tracks among others the:

  • DJ AIG Petroleum Sub IndexDJ AIG Crude Oil Sub Index
  • December ICE Brent Futures Contracts (1 year maturity)
  • December NYMEX WTI Futures Contracts (1 year maturity)
  • DJ-AIG Unleaded Gasoline Sub-Index

There are also products that can actually leverage the performance of these indices and also those which provide an inverse performance.

In this case, a short fund grows in value as the normal index falls back. So if you become bearish on light sweet crude oil you could, for example, on this basis consider the merits of a short fund, and gain while the price of crude oil is falling.

Whichever of the above trading or investment vehicles you may use, they do provide a varying degree of exposure to light sweet crude oil as traded on the major oil markets.

This way you can diversify into this significant sub-sector of the energy commodity complex going forward.

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