Chapter 2-4 Energy Commodities


Main Exchange

Contract Size

Trading Symbol

WTI Crude Oil


1000 bbl (42,000 U.S. gal)


Brent Crude


1000 bbl (42,000 U.S. gal)




29,000 U.S. gal

AC (Open Auction) ZE (Electronic)

Natural Gas


10,000 mmBTU


Heating Oil


1000 bbl (42,000 U.S. gal)


Gulf Coast Gasoline


1000 bbl (42,000 U.S. gal)




1000 bbl (42,000 U.S. gal)


RBOB Gasoline (reformulated gasoline blendstock   for oxygen blending)


1000 bbl (42,000 U.S. gal)



Crude Oil

Sometimes mythic, often controversial, crude oil has been an important component of our modern times. Crude oil comes in many colors and consistencies, from hydrocarbon rich reservoirs in Texas to the heavy oil sands of Canada and Venezuela. Usually named for their region of production as well as other factors, crude oil properties can include various elements including carbon, nitrogen, oxygen, sulfur, and metals. Due to international appeal and demand, there are different tradable crude oil contracts across the globe, but for our purposes we will focus on the NYMEX Light, Sweet crude oil contract, so named for its low sulfur content.

Crude oil is not limited to modern uses as history shows examples of petroleum products being applied for nearly four thousand years. However, there is no doubt that the volume of consumption and the variety of applications for crude oil exploded in the middle of the nineteenth century. First driven by the demand for kerosene and oil lamps, the introduction of the internal combustion engine sealed our fate and ushered in the era of oil booms across the United States. As oil quickly overtook coal as the world’s leading fuel, it was only a matter of time before reservoirs began to be outpaced by demand and the first “energy crisis” hit in the 1970’s. In the 1980’s, increased production and lower demand led to an “oil glut”.

US imports in the last three decades are illustrated as follows:


The most well known deposits of petroleum are porous rock formations in which the hydrocarbons that make up the oil are sealed within the rock by an impermeable rock above. These reservoirs are accessed by drilling and pumping. Unconventional oil deposits of heavy crude oil exist in oil sands or oil shales which contain migrating oil or trapped hydrocarbons. Heavier crude oil deposits are often more expensive or require a more intensive process to extract the oil. Most geologists attribute the formation of oil to the compression and heating of organic materials over extremely long periods of geologic time. However, there is an alternate theory that suggests natural petroleum was formed from deposits which may date to the formation of the earth rather than biological origins.

World crude oil supply and demand stats are highlighted in the following:


Key Terms

Crack Spread = Based on the word cracking which is the word for breaking down crude oil into products at a refinery. A crack spread is a term used when referring to the price difference between crude oil and extracted products like gasoline or heating oil.

Light, sweet or sour crude oil = Oil comes in various colors and viscosities. Light, sweet crude oil has less sulfur and is lighter than sour crude oil. Light, sweet crude oil is usually in higher demand for refining into gasoline, kerosene and diesel.

Oil sands or tar sands = are semi-solids of crude oil, sand, and water. Usually sticky, sands need to be extracted in unconventional ways since they do not flow like those deposits used with well methods. Big deposits include Athabasca oil sands in Canada and Orinoco oil sands in Venezuela.

Hubbert Peak Theory = A geologist working for Shell Oil in the middle part of the last century is widely recognized as the first person to predict an oil peak. M. King Hubbert noted that oil discoveries tended over time to form a bell shaped curve. He suggested that oil production over time would follow a similar path with production in the lower 48 states peaking between 1965 and 1970. Hubbert went on to predict global oil production would peak in the last five years of the 20th century.

Using his predictive curve, it appears as though 54 of the largest oil producing nations have already passed their peak of production and are in decline. However, controversy surrounds the theory since many regions lack transparency in accounting for oil reserves. Conclusions vary from intimating that the global peak has already passed to the optimistic notion that the peak will come in 2035. Fossil fuels are defined as finite and since supply can be a major factor when considering pricing – if not the most important – the implications of the theory are boundless.

OPEC = The Organization of Petroleum Exporting Countries (OPEC) is a group of thirteen oil producing nations: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Created in 1960 and with current headquarters in Vienna, the stated objective of OPEC is to coordinate and unify member petroleum policies to secure fair and stable prices. Actions, statements, and policy changes from member nations can have an immediate impact on the price of oil and meetings are usually foreshadowed by media and trader speculation.

Geopolitical Tensions = Disputes and conflicts in any producing nation will naturally have an effect on oil prices. The Gulf War and the War on Terror are probable examples as they centered on top producing regions of the world. Smaller – though no less grave – incursions in or around oil pipes, oil pumps, and oil refineries in areas of Asia and Africa can also affect production, distribution, and price.

Alternative Fuels/Environmental Concerns = Controversy surrounds petroleum products and is rooted in the potential harmful effects to the environment and atmosphere. The late 20th and early 21st centuries have focused on producing alternative fuels and engines. They have also seen significant environmental issues ranging from oil

spills to the impact of drilling in preserved areas. Alternately and perhaps ironically the effect of the environment on oil production is a key area for concern especially during the Gulf hurricane season when offshore platforms become natural targets and production is pared back or halted completely. The same effect can be felt during winter storms in the North Sea.
Crude oil is normally taken to refineries for the hydrocarbon chemicals to be distilled into the common products we are all familiar with or to be mixed with chemicals to create other products including:

  • Diesel fuel
  • Gasoline
  • Jet Fuel
  • Kerosene
  • Natural Gas
  • Lubricants
  • Tar
  • Paraffin

Heating Oil

Primarily used as a fuel to heat residential homes, heating oil is derived from domestic refineries as well as imports from foreign countries. This flammable liquid petroleum product is often considered seasonal because of this use. The contract specifications in this report will refer to the No.2 fuel oil NYMEX futures contract.

Heating oil is usually included in the distillate fuel oil family as designated by refineries. These distillates can include diesel fuel and heating oils which is why the heating oil futures contract may be considered for use in hedging for diesel fuel and jet fuel. Fuel oil – or No 2 fuel oil – is usually the second largest resultant “cut” from a barrel of crude oil after gasoline. Delivered by tanker truck to residential and commercial buildings, fuel oil can be stored in tanks until required for boiler or forced air furnaces.

Distillate products from domestic sources or imports from Canada or Venezuela may be shipped all over the United States via pipelines, tankers, and rail cars. Central distribution areas (like New York Harbor) or storage terminals may hold fuel oil until redistribution. In the United States, the typical season for heating oil use is from October through March. Refiners often produce heating oil throughout the summer and fall months and store it for winter use; however, they may also refine heating oil in the winter. Like gasoline, the price of heating oil is determined by more than one factor. Costs to produce and distribute the product are just a couple of examples.

Key Terms

Crude Oil Prices = Since a large component of pricing heating oil is based on the price of the crude oil, fluctuations in one may incur changes in the other.

Seasonal Demand = Price volatility may change based on the perceived consumer needs for winter heating.
Weather = Since a large percentage of the consumer base for residential heating oil is in the Central and North Atlantic states, any significant cold weather or lack thereof may contribute to price volatility. Also, hurricanes along the Gulf Coast can impact production at refineries located in that region or affect terminals receiving imports.

Refining = Any changes or disruptions to refinery production is worth noting including scheduled or unscheduled shutdowns.

Industry Reports = Like crude oil and gasoline, heating oil inventories can be of significance as any unexpected increases or decreases in supply may affect price. Volatility may also increase around the release of these reports, including the weekly American Petroleum Institute and Energy Information Administration reports.

Environmental Concerns = Changes to or perceived issues regarding the emissions from residential oil burners may also be worth nothing.

Heating oil is used primarily as a fuel to heat residential homes; mainly in New England and the Central Atlantic States.

Natural Gas

Natural gas is an important source of energy across the globe and – although a reasonably unassuming colorless and odorless gas in its pure form – is vital to many societies. This combustible combination of hydrocarbon gases is a unique member of the energy sector and our contract specifications refer to the NYMEX futures contract.

Natural gas as a fossil fuel can be found in fields and coal beds across the globe. It can also be produced by chemically treating coal or from the anaerobic decay of organic materials – biogas – from swamps, marshes, landfills, and sewer. Natural gas use is not confined to modern origins – and from the flame of the Oracle of Delphi to bamboo pipelines built in ancient China, natural gas has proved a source of creative inspiration as well as valuable energy. Britain and the United States used natural gas for lights through the late eighteenth century and the first natural gas-specific well was dug in the early nineteenth century. Unrefined natural gas is primarily composed of methane – up to 90 percent in some cases – but can also contain ethane, propane, butane, carbon dioxide, oxygen or nitrogen. Nearly pure methane is considered “dry” natural gas while the presence of hydrocarbons, as the name implies, means it is “wet”. In processing,

mercaptan is added to natural gas to give it the sulfur-like odor for safety in leak detection. Gas is collected in storage tanks and added to pipelines when required.


Natural gas can also be chilled and stored as a liquid for transport and export. This Liquid Natural Gas (LNG) is turned back into gas and added to pipelines at destination.

The top five exporters are illustrated as follows:


As with crude oil, weekly statistics released by the EIA can bring a fair amount of price volatility to natural gas markets.

In addition to the weekly reports, the following items can also bring price fluctuations and are events and information worth noting:

Supply and Demand – The level of natural gas supply relative to overall demand can fluctuate and affect prices. Possible seasonal demand and competition on a retail level can also exert pressure on supplies particularly during colder winter months when usage for heating increases. Any event which threatens the supply or refining output – such as weather disruptions (like hurricanes) or pipeline issues – may affect prices.

Geopolitical Tensions – Pipeline or politically motivated supply disruptions from major suppliers like Russia may impact prices, and tensions in the Middle East can also bring price volatility.

Environmental Issues – The drive for cleaner burning fuels may change the supply and demand dynamic of natural gas since it may release fewer sulfur, carbon, and nitrogen emissions than other fossil fuels. It does, however, release carbon dioxide which many people believe may change the global climate.

Available Reserves – Although producers are now working at gathering natural gas from challenging or innovative sources like shale, the same concerns of finite supply which plagues crude oil affects natural gas.

Natural gas can be used for gas turbines and steam turbines in electricity generation. Supplied to homes, it is used in appliances and central heating. Compressed natural gas may also be used for automobile fuel.

RBOB Gasoline

Often considered the life-blood of developed nations, RBOB is one of the headline-making products from the energy sector of NYMEX. Short for “reformulated gasoline blend stock for oxygen blending”, this crude oil derivative is an integral part of daily life and the subject of frequent debate and news discussions.

Gasoline is one of the many products that come from crude oil and normally accounts for the bulk of refinery products. From a typical barrel of oil, processing can yield the following:


Gasoline quality and constituents can vary based on the type of crude oil it is derived from and the refining process used to produce it. It must also meet particular standards and environmental regulations which can vary from state to state and country to country. RBOB in particular is oxygenated via oxygen bearing compounds which are

intended to reduce carbon monoxide emissions as well as smog and air pollutants. Ethanol is one of these added compounds, and in the United States corn ethanol is normally used.

Since specific areas have different requirements, gasoline produced distinctly for some areas cannot be used or substituted in others. Gasoline is normally held in bulk storage terminals after shipment through the pipeline and many additive packages are blended in the truck tank.

According to the EIA, the main components of the retail price of gasoline include the price of the crude oil, Federal and States’ taxes, refining costs and profits, and distribution and marketing costs. The percentage weight of these components in the overall price of gasoline can and has varied at different times and in different regions of the country.

Gasoline quality and constituents can vary based on the type of crude oil it is derived from and the refining process used to produce it. It must also meet particular standards and environmental regulations which can vary from state to state and country to country. RBOB in particular is oxygenated via oxygen bearing compounds which are intended to reduce carbon monoxide emissions as well as smog and air pollutants. Ethanol is one of these added compounds, and in the United States corn ethanol is normally used.


Precious Metals

Commodity Unit Currency Main Exchange
Gold troy ounce USD ($) NYMEX
Platinum troy ounce USD ($) NYMEX
Palladium troy ounce USD ($) NYMEX
Silver troy ounce USD ($) NYMEX


Industrial Metals

Commodity Unit Currency Main Exchange
Copper Metric Ton USD ($) London Metal Exchange,   New York
Lead Metric Ton USD ($) London Metal Exchange
Zinc Metric Ton USD ($) London Metal Exchange
Tin Metric Ton USD ($) London Metal Exchange
Aluminium Metric Ton USD ($) London Metal Exchange,   New York
Aluminium alloy Metric Ton USD ($) London Metal Exchange
Nickel Metric Ton USD ($) London Metal Exchange
Cobalt Metric Ton USD ($) London Metal Exchange
Molybdenum Metric Ton USD ($) London Metal Exchange
Recycled steel Metric Ton USD ($) Rotterdam