International Petroleum Markets

Crude oil price

75 $/b

70

65

60

55

50 Iraq
OPEC Kuwait Tension
45 events
quotas crisis on
Netback
40 Iran/Iraq contracts gasoline
war th
35 11
Nationalization sept.
Cold winter
30
of oil fields 3rd OIL
25 SHOCK
OPEC 2nd OIL
20 domination SHOCK
© 2004 ENSPM Formation Industrie - IFP Training

15 Iranian
revolution OPEC
10 Quotas
1st OIL SHOCK
5 Asian crisis Agreement Mexico,
Yom Kippur war Venezuela, Saudi Arabia
0
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source : Platt's
SEG - S 402*16 – March 2007
 Historical pricing of crude oil

75 $/b

70 Posted Official Spot Prices... …and Futures Prices

Price Price
65

60

55

50

45

40

35

30

25

20 Majors ’

© 2004 ENSPM Formation Industrie - IFP Training

Control
15

10
OPEC
5 Domination
0
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source : Platt ’s
SEG - M101*1 – March 2007

Development of international oil markets

1970 ’s • Upstream / downstream Guarantee

Security of • Long term
decoupling contracts
supplies
Controlled • Domination by OPEC
Markets countries

• Sharp price rises • Purchase at the

1980 ’s lowest possible • Spot markets
• Increasing volatility price • Future and forward
• Supply surplus • Limit financial markets
Advent of
risks
Market Freedom
© 2004 ENSPM Formation Industrie - IFP Training

1990 ’s • Moderate prices • Formula price

• New geopolitical order Use reliable 3 benchmark crudes
• Generalized need for benchmark • Screen quotations
Advent of hedging prices • Swaps & options
Financial Markets

SEG - M102*2 - June 2000

 Valuation of a crude
Products Sales

1/3 Light
400 $/t *

1/3 Medium
300 $/t *

1/3 Heavy
200 $/t *

© 2004 ENSPM Formation Industrie - IFP Training

Transportation Costs Refining Costs Gross Product Worth
15 $/t 20 $/t 300 $/t

Netback Value (* Non contractual figures)

300-15-20 = 265 $/t
SEG - M201*3 - June 2005

Simple netback value calculation : Arabian Light

ROTTERDAM PRODUCT YIELD VALUE of PRODUCT

PRODUCT TYPE
SPOT PRICE ($/t) % weight obtained, $/t

GASOLINE + LPG 577 31 179

GAZOLE + JET FUEL 560 43 241

FUEL OIL, 3 % S 218 20 44

TOTAL VALUE OF ARABIAN LIGHT'S PRODUCT YIELD 464

- REFINING COST - 20
© 2004 ENSPM Formation Industrie - IFP Training

- SPOT FREIGHT COST - 10

= IMPLIED FOB VALUE OF REFINED ARABIAN LIGHT CRUDE 434 $/t

Source : Pétrostratégies
SEG - M123 – July 2005
 Price differential
1 - Quality Differential

Light
LIGHT CRUDE 400 $/t
° API > 33° Medium
300 $/t
Heavy
200 $/t

Light
400 $/t
HEAVY CRUDE Medium
° API < 22° 300 $/t

© 2004 ENSPM Formation Industrie - IFP Training

Heavy
200 $/t

Light Crude Price > Heavy Crude Price*

(*) + Sulphur content differential to be taken into account
SEG - M221*4 – Juin 2005

Price differentials
2 - Transportation Differentials

North Sea
0,5 $/b
Price FOB Gulf + 2 $
=
Rotterdam
Price FOB North Sea + 0,5 $

Persian Gulf
© 2004 ENSPM Formation Industrie - IFP Training

2 $/b

SEG - M222*6 - June 2005

 Long term contracts

Seller’s interest : Lo
n
Co g Te
nt
- Guarantee the level of sales ra r m
ct

Buyer ’s Interest :

- Guarantee access to a crude oil of a given

quality
- Limit transaction costs

© 2004 ENSPM Formation Industrie - IFP Training

More than 50% of traded volumes

Duration : more than 1 year, possibility of extension

Prices indexed on benchmark crude spot prices

SEG - M301*11 - June 2000

Major international petroleum markets

BRENT ZONE
OMAN - DUBAI
ZONE

Amsterdam
Rotterdam
London Antwerpen
Tokyo

New-York Genoa
Lavera
Caribbean

W.T.I. Arabian/
Persian Singapore
ZONE Gulf
© 2004 ENSPM Formation Industrie - IFP Training

TAPIS
ZONE

Crude oil spot market

Products spot market
SEG - M401*7 - August 2004
 Petroleum markets

Physical

SPOT
OTC
(over the Dating
counter)
FORWARD

© 2004 ENSPM Formation Industrie - IFP Training

FUTURES

Futures
SEG - M701*16 - April 2004

Spot transactions

Free markets, either “spot” or “forward”

³ Exchanges on a case by case basis

³ OTC markets (OTC : Over The Counter )

³ No regulation body : low price transparency

³ Actors :
Š producers
Š refiners
Š brokers
© 2004 ENSPM Formation Industrie - IFP Training

Š traders
³ “Spot” prices for some crudes, indexed on benchmark crude
prices for the others.
³ “Forward” price = price set for a future delivery
SEG - M302*8 - June 2000
 European benchmark crude: the Brent

³ A « classical » crude: light (38° API) and sweet (0.3 S%),

corresponding to the market demand in Europe.
³ Production in the consuming area, thus possibility of quick
supply for the refiner.
³ Considerable physical production.
³ Large number of producers.
³ Brent trade is well organised and attracts a lot of traders

© 2004 ENSPM Formation Industrie - IFP Training

³ Forward Brent et Dated Brent

Price transparency ?

SEG - M501*9 - June 2000

Examples of prices formulae - Saudi Arabia

ARABIAN LIGHT EUROPE

¾ Sale FOB
¾ Indexed to IPE Brent Weighted Average (BWAVE)
¾ Differential (February 2007) : - 6,05 $/bl
¾ Price based on a monthly average af BWAVES
(month following the month of loading)

ARABIAN LIGHT FAR EAST

© 2004 ENSPM Formation Industrie - IFP Training

¾ Sale FOB
¾ Indexed on (Oman + Dubaï) / 2
¾ Differential (February 2007) : + 0.05 $/bl
¾ Price timing : date of loading
¾ Price based on a 30 day average

Source PIW
SEG - M511*12 – February 2007
 Differential Brent vs Oman

$/b
10

© 2004 ENSPM Formation Industrie - IFP Training

-2

-4
1/85 1/86 1/87 1/88 1/89 1/90 1/91 1/92 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07

Source : Platt ’s
SEG - M516 – February 2007

RAS TANURA
BWAVE * taken in May

April May 1st nearby June

=July IPE Brent

Loading 1st nearby

5th - 7th April = June IPE Brent The final price is known
only on July 1st

SIDI KERIR
1st nearby = June IPE Brent

April May June

© 2004 ENSPM Formation Industrie - IFP Training

Loading
5th - 7th April
The final price is known only on May 1st
1st nearby
= May IPE Brent
* BWAVE : Brent Weighted Average
SEG - M512*25 - June 2000
 Main international cargo markets for oil products

LOCATION TYPE SUPPLY MARKET

US West Coast Import Gasoline - Europe (summer) US oil market

(New-York) Gas-oil - US & Carraibean in
winter
Fuel-oil- US Gulf, Caribbean, US East Coast power utilities
Mediterranean

Gulf of Mexico Export Local refineries Fuel oil, mainly to US East Coast
Caribbean Gas oil to New-York in winter
Europe in summer

NWE/ARA Zone Export Local refineries plus products North West Europe, especially
(Rotterdam) Import from Mediterranean, gas oil to Germany, and for peak demand: US
Caribbean and CIS

© 2004 ENSPM Formation Industrie - IFP Training

Med . Zone Export Mediterranean refineries Mediterranean, North West Europe
(Gênes, Lavera) US, Red Sea , Arabo Persian Gulf

Arabo Persian Export Local refineries Far East, mainly fuel oil and naphtha
Gulf

Singapore Export Singapore refineries Mainly Japan, also balancing requirements

of other South East Asian markets and China

SEG - M311 - March 2005

Rotterdam spot prices

$/ton
800

700

600

500

400
GASOLINE

300 GAS OIL

200
© 2004 ENSPM Formation Industrie - IFP Training

100
FUEL OIL
(3.5% sulphur)
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source : BIP et Platt’s

SEG - M611*14 – January 2007
 Price determining factors of the oil markets

FUNDAMENTALS

 Day to day balance of the regional physical markets

 Production levels and capacity
 Variation in consumption

 Level and variation of the different stocks

The NEWS
NE
W
Technical, economic and political information likely to S

affect the estimated supply demand balance even at the

pre-confirmation.

© 2004 ENSPM Formation Industrie - IFP Training

TECHNICALS

Analysis of historical price series, chart-methods

SEG - M602*15 - June 2000

Futures contracts

³ Obligation for the buyer to take delivery and for the seller to
deliver, a standard quantity of a standard quality of product at
a subsequent date (maturity)

³ Specific organized markets exist for this type of transaction

³ The price of the contract is the market price of the commodity

at the time when the contract is executed. It is the only
© 2004 ENSPM Formation Industrie - IFP Training

negotiable parameter.

SEG - M711*17 - June 2000

 Features of futures markets

Q Futures market = financial market

Q Fully standardised financial contracts are negotiated

Q Example : NYMEX - W.T.I. Market (New-York)

³ 1 contract = 1 000 bbls of W.T.I.
³ Hours of business (New-York time) : 10h00 a.m. - 14h30 p.m.
³ Minimum variation : 1 cent/b
³ Maximum variation : 7,5 $/b
³ Maximum period for execution : 30 successive months then 36,48, 60, 72 and 84 months
³ Delivery : FOB Cushing Oklahoma

© 2004 ENSPM Formation Industrie - IFP Training

Q Settlement of a contract :
³Opposite transaction
³Physical delivery in 1 to 3% of cases

SEG - M713*20 - February 2001

Principals Futurs petroleum contracts

NYMEX ICE Futurs TOCOM
Heating Oil #2 NY Harbour 1978 Gasoil 100 T 1981 Kerozene JIS K2203 grade 1
42’000 gallons 18 months 12 months/ 4 quarters/ 2 semesters 100’000 litres 6 months

Light, Sweet Crude (WTI) 1983 Brent Blend 1988 MECO (Middle East Crude Oil)
1’000 Bbl 1’000 Bbl 50’000 litres 6 months
Each month for 5 years, then 1 year 30 months / 9 semesters
Regular Gasoline grade 2
Unleaded Gasoline NY Harbour NYMEX Europe 100’000 litres 6 months
42’000 gallons 12 months
Gasoil JIS K2204
Brent crude 2004 100’000 litres 6 months
Brent Blend 2004
1’000 Bbl 30 months
1’000 Bbl 84 months
MCX
REBCO (Primorsk) 2006 NWE Gasoil 2004
1’000 Bbl 72 months 42’000 gallons 18 months Brent Crude 2002
1’000 Bbl 3 months
Sing. 380cst Fuel Oil 2006 ICE
© 2004 ENSPM Formation Industrie - IFP Training

100 MT 36 months
WTI 2006 Failures
In 2007:
1’000 Bbl 60 months / 2 semesters
NYMEX: UNL, WTS
DME
IPE: Naphtha, UNL
DGCX
Middle Eastern based Sour Crude SIMEX: Gasoil, Dubai
Fuel Oil Fujairah 100 MT SGX: MECO
SEG - M811*20 – January 2007
 Exemple of hedging using Futures

A trader is buying on month M a WTI cargo at 30$/b. The spot market price is
30.5 $/b. He will deliver it one month later at the market price (day of delivery).
Risk of loss in case of price decrease

PHYSICAL MARKET FINANCIAL MARKET (NYMEX)

$/b $/b
Scenario Purchase Sale of
Cost 30 Income P
contracts

Income 28 Cost (P- 2.5)

Price 1 month 1 month
decrease later Total -2 later Total + 2.5

© 2004 ENSPM Formation Industrie - IFP Training

Price Sale at Income 32 Purchase Cost (P+1.5)
increase spot price of contracts
Total +2 Total - 1.5

SEG - M801*21 - February 2005

Volumes of WTI exchanged on the NYMEX

300 Million Barrels

250

200

150

100

50
© 2004 ENSPM Formation Industrie - IFP Training

0
83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

od n

n
ec

t io

tio
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

(D

US d uc

uc
06

o
pr

pr
20

TI
W

Source : NYMEX
SEG - M1201Bis
 Price structure

CONTANGO BACKWARDATION
Price ($) Price ($)
3rd Spot
month
1st
2nd month
month 26$
26$ 2nd
1st month
month 3rd
month
25$

© 2004 ENSPM Formation Industrie - IFP Training

Spot
25$

Anticipation of increase in prices Anticipation of decrease in prices

SEG - M832*23 - June 2000

Uses of the futures market

30 $/t
New Productions ?
25
OPEC decisions ?
20

15 Strikes ?

10
Political stability ?
5

0
1998 1999 2000
© 2004 ENSPM Formation Industrie - IFP Training

³ Discovery of price anticipations

³ Price fixing
³ Hedging against the volatility of physical markets
³ Stocks management and financing
SEG - M841*24 - June 2000