Definitions

To expand your understanding of trading in general and of energy markets in particular, we have decided to create a comprehensive resource, which explains industry terminology and concepts used on our website. A search bar will be added shortly.


  • Aframax refers to a class of oil tanker of medium size, larger than Panamax and smaller than Suezmax. Aframax tankers are in the range of 80-120 DWT. The typical drafts vary by vessel but are usually in the region of 14.5-15.5 m. They are used for crude and refined product shipment. If moving products, they are often called LR2. Aframax crude tankers are typically used in short- to medium-distance routes and to serve ports that cannot handle the larger and lower-cost-per-barrel Suezmax or VLCC tankers. The name Aframax comes from an oil tanker rate system introduced by Shell called the Average Freight Rate Assessment.
  • API gravity - a commonly used index of the density of a crude oil or refined products. API stands for the American Petroleum Institute, which is the industry organization that created this measure. API is calculated from a hydrocarbon's specific gravity using this formula: API = (141.5/Specific Gravity) - 131.5. A crude oil will typically have an API between 15 and 45 degrees. Higher API indicates a lighter (lower density) crude. Lower API indicates a heavier (more dense) crude. Generally, lighter (high API) crudes are more valuable because they yield more high-value light products when run through a refinery. Light crude is typically in the 35-45 API range, which includes most of the highest valued crudes such as Brent and WTI. Crudes lighter than 45 are typically considered extra-light crude or condensates and are valued lower than light crude because they contain a lot of light ends such as propane and butane. A medium crude is in the 25-35 API range, and a heavy crude is in the 15-25 API range. Anything below 15 API would be considered an extra-heavy crude.
  • ARA - refers to the ports of Amsterdam, Rotterdam, and Antwerp in the Northwest Europe refining hub market. Spot transactions for refined products in these ports are commonly used as indicators for the Northwest Europe market overall and are thus called "ARA basis." These ports are used as a reference because they all have deep, active trading markets and are close enough to each other to be considered interchangeable.
  • Associated gas - natural gas that is produced along with crude oil, and typically separated from the oil at the wellhead. In contrast, non-associated gas is produced from a well that does not also produce crude oil.
  • Backwardation - a market condition where prices for a commodity in the future are lower than current or prompt prices. In a backwardated market, there is an incentive to draw down inventories to capture higher prices before they decline. Utilization of storage facilities tends to decline during backwardated market periods. Backwardation is the opposite market condition to contango.
  • Barrel (BBL) - a common measure of volume used in the oil industry, for both crude oil and refined products. A barrel is equal to 42 US gallons. The typical alternative measure is weight (in tons). The relationship between tons and barrels varies with a commodity's density.
  • Benchmark (price) - a price quote for a crude grade or product that is used as a reference for pricing other crudes or products. Typically, benchmarks are for a highly traded commodity, with a quality and location that are similar to other commodities. Some examples are: Brent crude, FOB in the North Sea and WTI crude, in Cushing.
  • Blendstock - any unfinished oil that is blended with other similar unfinished oils to make a final refined product. Most blendstocks are produced and used inside the same refinery. However, some are traded in the market, either between refiners or with third-party product blenders.
  • BOE (barrels of oil equivalent) - a measure of hydrocarbon volume (typically used for natural gas) in terms of the barrels of crude oil that would have the same energy content. BOE is typically used as a way of comparing natural gas volumes to crude oil when measuring reserves or production. There is no single standard conversion factor for BOE, but a common one is 5,500 cubic feet of natural gas to one barrel of oil equivalent.
  • Bond Yield - the amount that a bond pays each year in interest as a percentage of its current price. Government bond yields act as an indicator of expectations for the direction of the country’s interest rates. In theory, there should be a positive correlation between government bonds yields and the demand for the nation's currency.
  • Break-even - refers to a market condition where prices are at levels that result in a marginal source of supply operating at zero variable cash profitability (i.e., just breaking even on the last unit supplied). A common example is break-even for the marginal refining configuration in a hub market.
  • Brent - light sweet grade of crude oil produced in the North Sea. Brent plays a uniquely important role in the global oil industry by acting as a benchmark crude against which most other crude grades are priced. Brent is important as a regional benchmark for a large number of light sweet crude oils produced in the North Sea. It is also used as a global benchmark for overall global crude prices. Brent's role as a benchmark is reinforced by its active forward and derivatives markets. Bent's quality: API: 37.5; Sulfur: 0.40%.
  • BTU (British thermal unit) - a measure of energy content commonly used in the oil and gas industry. A Btu is equivalent to 1,055.06 joules.
  • Bunker fuel - any fuel used on board a ship. The most commonly used type is residual fuel oil bunker or Bunker C. The bunker fuel which can be used in the Sulfur Emissions Control Areas (SECAs) must have a maximum sulfur content of 0.1%, which requires either using Bunker A or a Ultra Low Sulfur Fuel Oil (ULSFO). SECAs currently include the Baltic Sea, the North Sea, the English Channel, and the area up to 200 nautical miles off the North American coast plus a zone in the Caribbean. From January 1st, 2020, bunker fuels used globally outside the SECA regions will be restricted to having a maximum sulfur content of 0.5%. Grades of Bunker fuel:
  1. Bunker A - Gasoil range bunker fuel, typically called marine diesel or marine gasoil
  2. Bunker B - Low-viscosity vac resid range bunker fuel. Typically cut with some lighter material (VGO) to reduce viscosity to the point that it will flow without heating
  3. Bunker C - The most common form of bunker. Composed primarily of vac resid range material, with a high viscosity that requires heating in order to pump. Typically sold at several viscosity specifications: 180 centistoke, 380 centistoke, or 460 centistoke, with 380 being the most common grade. The viscosities are measured at 50C, the typical heated temperature of the fuel
  • Contango - a market condition where prices of a commodity in the future are higher than current (prompt) prices. When a market is in steep contango (very high future prices), it creates an incentive to build inventories. Contango is the opposite market condition to backwardation.
  • Contiguous United States - the 48 States and the District of Columbia, wholly filling an unbroken block of territory and excluding Alaska and Hawaii. Although the official reference applies the term "conterminous," many use the word "contiguous," which is almost synonymous and better known. Other synonymous terms are "CONUS" and "Lower-48".
  • Cracking - a broad term that refers to any process that results in the breaking down of larger hydrocarbon molecules into smaller molecules. Most of the major conversion units in a refinery perform some type of cracking. Cracking can be achieved through the use of heat (thermal cracking) or hydrogen addition (hydrocracking), often in the presence of a catalyst (catalytic cracking / hydrocracking). Cracking in its various forms is the primary means of improving the product yield of a refinery to include more of the high-value light products and less of the low-value heavy products.
  • Crack spread - the difference in price between a refined product (or group of products) and crude oil. It is used as a rough indicator of market conditions, roughly approximating the margin from processing light sweet crude through a cracking configuration refinery. Typically, a crack is defined in terms of one specific product versus one specific crude. For example, the diesel crack on Brent. In this case, it is meant to indicate how much the price of the individual product is contributing to refining profitability. Some more complicated cracks are used to provide a somewhat more accurate indicator of overall refining margin: 3-2-1 crack - defined as (2 x gasoline price + 1 x diesel price) - (3 x crude price); 6-3-2-1 crack - defined as (3 x gasoline price + 2 x diesel price + 1 x fuel oil price) - (6 x crude price).
  • Crude oil - a naturally occurring mixture of liquid hydrocarbons. In its natural state, crude oil has few direct uses. However, when it is processed through an oil refinery, it can be transformed into a wide variety of highly valued liquid petroleum products such as gasoline and diesel. The value of these products comes from their high energy density and liquid state, which makes them ideal as transportation fuels. Crude oil comes in hundreds of different varieties, called crude grades. As a naturally occurring raw commodity, crude oil from different fields and reservoirs can have very different properties. Crude grades from the same location with similar properties will typically be referred to as a single grade. Examples of some well-known crude grades are Brent, Tapis, and WTI. There are a wide variety of different properties that are used to distinguish between crude grades. These are detailed in a chemical analysis of the crude called a crude assay. The most common characteristics used to identify the quality of a crude are its API gravity and its sulfur content. The highest valued crude grades are typically those with high API gravity and low sulfur content. These are referred to as "light-sweet crudes." At the opposite end of the spectrum are the grades with low API gravity and high sulfur content, which are referred to as "heavy-sour crudes".
  • Cushing is a major crude oil trading, storage, and transportation hub located in Oklahoma in the US. Cushing is important as a point where large volumes of US-produced crude are gathered from across the inland regions of the country. Cushing has a large capacity to blend and store crude, and pipeline connections with most of the major producing and refining centers in the middle part of the US. Cushing has become a major trading point, because of the volume of crude that moves through it and the availability of crude storage and blending facilities. Trading at Cushing serves as the basis for the NYMEX light sweet crude market in spot and derivatives trading.
  • Density (Gravity) - the weight of a commodity per unit of volume. Typically, lighter (lower density) crude oils are more valuable.
  • Diesel - one of the major petroleum products produced from processing crude oil in a petroleum refinery. Diesel is one of the higher-valued light products (along with jet fuel and gasoline). It is used primarily in the transportation sector, and it is the primary fuel used in heavy-duty trucks and locomotives. Also, in some markets, it is used in light-duty cars and trucks. Diesel-range material also has a number of off-road uses, as a fuel for construction and farm equipment and as a heating fuel (home heating oil). However, this is a much smaller share of use than the transport sector uses. Generally, refiners will try to maximize their yield of diesel, along with gasoline, to maximize profit. Since the two products draw from different boiling range material, they are largely complementary. However, there are a few conversion units that favor one over the other, forcing refiners to make a call on which will be more value-creating. Diesel tends to compete with jet fuel for some of the same blendstocks, specifically kerosene, which makes up most of jet fuel and is a good blendstock into diesel. As a result, maximizing jet fuel production can come at the cost of diesel yield, and vice versa.
  • Distillate is a term used to refer to a range of light products ranging from kerosene to diesel. Generally, the distillate products are considered to include: Kerosene, Jet fuel, Diesel, Heating oil, Industrial gasoil (IGO), Marine gasoil (MGO).
  • DOE (U.S. Department of Energy) - the US federal agency responsible for energy policy. It also houses the EIA (Energy Information Administration).
  • Downstream refers to the part of the petroleum value chain where crude oil is converted into marketable refined products. Refining is the core part of the downstream, though transportation and marketing are sometimes also included in the definition.
  • Driving season refers to summer in the Northern Hemisphere when demand for gasoline is typically at its seasonal peak.
  • Dry natural gas is natural gas that contains little or no natural gas liquids (NGLs). This can either occur naturally or result from removal of NGLs from the gas.
  • Drilled but uncompleted wells, also known as DUCs, are oil and natural gas wells that have been drilled but have not yet undergone well completion activities to start producing hydrocarbons. The well completion process involves casing, cementing, perforating, hydraulic fracturing, and other procedures required to produce crude oil or natural gas.
  • EIA (Energy Information Administration) - an agency in the US Department of Energy that is responsible for gathering and publishing data on the US energy sector. This includes detailed monthly data on oil and gas production, processing, movements, and consumption.
  • EPA (Environmental Protection Agency) - the government agency in the US responsible for environmental policy and regulation. The EPA sets environmental standards for refined products in the US, administers the renewable fuels mandate, and regulates direct environmental emissions from refineries.
  • Ethane - a simple hydrocarbon with 2 carbons and 6 hydrogens. Ethane is a gas at room temperature. It is produced from natural gas wells along with methane and is often left in the natural gas that is sent to market. Separated ethane is a major feedstock to steam crackers for the production of ethylene and its derivatives. In a refinery, ethane is produced as part of the refinery gas generated by many refinery process units and usually left in the gas burned as refinery fuel.
  • Ethanol - a non-refinery based hydrocarbon that is widely used as a gasoline blendstock. Ethanol is blended into gasoline for a variety of business and policy reasons. Ethanol has high octane and can be used as an octane booster. Because ethanol contains oxygen, it can be used to reduce the carbon monoxide emissions from burning gasoline. Also, as a renewable fuel, ethanol blending is mandated in some markets to reduce reliance on fossil fuels. Fuel ethanol is typically manufactured by fermenting the sugars in agricultural products such as corn, sugar cane, and beets. When produced this way, it is able to receive biofuel credits in countries with these regulations. In the US, most ethanol is produced through fermentation of corn. In Brazil, sugar cane is the most common feed stock. When blended into gasoline, ethanol significantly raises the octane and vapor pressure. However, its impact on both qualities varies widely with the concentration of ethanol in the mix and the chemical properties of the other hydrocarbons in the blend. As a result, ethanol is typically blended into gasoline in fixed ratios (e.g., 10%, 15%). Ethanol-blended gasoline is kept segregated from ethanol-free gasoline. Ethanol has an energy content that is about 70% of typical gasoline. As a result, vehicles using ethanol blended fuels will have lower fuel economy. The price of ethanol blended fuel typically reflects this. Ethanol highly miscible with water. Consequently, ethanol and gasoline/ethanol blends must be kept clear of any water contamination. Otherwise the water (and any contaminants that collect in the water) would form a solution in the fuel and ultimately end up in vehicle engines. To avoid this, ethanol is typically kept separate from gasoline until loaded into a tank truck for final delivery. This means ethanol can not be distributed through the pipeline systems that move large volumes of gasoline in most countries. Ethanol shipments are primarily by (more expensive) truck, rail or barges.
  • Export netback - a common price-setting mechanism in which the price of a commodity is set in one place based on the value of the commodity in the market it is being sent to, minus the cost to move it to that market. Export netback pricing can occur naturally through market dynamics, or it can be established directly through contract terms.
  • Feedstock - any hydrocarbon input to a process unit. This could be crude oil or any intermediate refining stream. When the term feedstock is used for the feed to the entire refinery, it typically means non-crude feedstocks such as VGO and blendstocks.
  • FID (final investment decision) - the point in the capital project planning process when the decision to make major financial commitments is taken. At the FID point, major equipment orders are placed, and contracts are signed for engineering, procurement, and construction.
  • FOB (free-on-board) - a common pricing basis for a commodity that is being shipped. FOB indicates that the price is for the commodity loaded onto a vessel and ready for shipping. So, it includes the cost of the commodity and of loading, but not the cost to deliver it to its final destination. For a FOB sale, title to the oil passes to the buyer as the oil passes the loading flange of the loading ship. FOB pricing is common in markets where a commodity is exported in large volumes to multiple destinations.
  • Forward contract - a contract between two parties for exchange of a volume of cargo at a specified future date for a specified price. For crude oil and refined products, there are two types of forward contracts: 1) OTC (over the counter) - a custom, non-exchange-traded forward contract; 2) Futures - a standardized, exchange-traded paper contract.
  • Forward curve - the future prices over time for a commodity predicted by the market based on forward transactions.
  • Fuel Oil - a broad term that could refer to a number of different refined products ranging in density from kerosene to residual fuel oil. However, it typically refers to residual fuel oil or No. 6 fuel oil. Grades of fuel oil used in US markets:
  1. No 1 - a fuel oil consisting of kerosene range material. Also called stove oil or range oil;
  2. No 2 - a fuel oil consisting of light atmospheric gasoil material. This is the fuel oil used as a home heating oil. It is very similar to diesel but of lower quality. Typically, it has a lower cetane and higher sulfur content. Also called Bunker A;
  3. No 3 - this is a now obsolete light gasoil range fuel oil, that has been combined with No 2;
  4. No 4 - a fuel oil consisting of VGO range material, intended for commercial heating furnaces lacking a preheater;
  5. No 5 - a fuel oil consisting of vac resid range material with a low viscosity, allowing it to be pumped without preheating. Also called Bunker B;
  6. No 6 - a fuel oil consisting of vac resid range material with a high viscosity, requiring preheating before pumping. Also called residual fuel oil or Bunker C.
  • Futures - highly standardized, exchange-traded forward contracts for crude and refined products. Only a limited number of commodities have futures contracts.
  • Gas plant takes refinery gas from the distillation units and other process units and separates out the gas liquids. The goal of the gas plant is to separate the more valuable heavy components (propane, butane, etc) for product blending or feed to conversion, and send the lower value methane and ethane to the refinery fuel system. Often there are two gas plants: a saturated gas plant that handles gas streams that contain only saturated hydrocarbons (no olefins) and an unsaturated gas plant that handles streams from cracking units that contain unsaturated olefins such as butylene and propylene. The gas plant is actually made up of a number of process units that perform different stages of separation. The typical sequence is as follows:
  1. De-ethanizer - Gas is pressurized and sent through an absorption tower to separate methane and ethane from the heavier components, which are absorbed into a naphtha stream (lean oil) to form fat oil
  2. Sponge absorption - The gas stream (methane and ethane) from the de-ethanizer is fed to another absorption tower where a kerosene stream (sponge oil) is used to extract any lean oil that might have been carried over
  3. De-butanizer - The fat oil from the de-ethanizer is heated and sent to a fractionation tower that separates the propane and butane from the naphtha based on boiling points
  4. De-propanizer - The mixed propane/butane stream from the de-butanizer is sent to a second fractionation tower to separate propane from butane based on boiling points
  5. De-isobutanizer - In some refineries, the butane stream from the de-propanizer is further fractionated in a (very tall) column to separate normal butane from isobutane
  • Gas to liquid - a process for producing refined products directly from natural gas instead of from crude oil, using the Fischer-Tropsch process.
  • Gasoil - a broad term that can refer to a range of intermediates and finished petroleum products, generally in the diesel or VGO range of distillation profile. Finished petroleum products sometimes referred to as gasoil include: diesel, heating oil (or industrial gasoil) and marine gasoil (marine diesel). Intermediates sometimes referred to as gasoil include:
  1. Light atmospheric gasoil (LAGO) - diesel range straight run material from the atmospheric distillation tower
  2. Heavy atmospheric gasoil (HAGO) - straight run material in between the diesel and VGO range from the atmospheric distillation tower
  3. Vacuum gasoil (VGO) - the lighter resid fraction from the vacuum distillation tower
  4. Coker gasoil - VGO range product from the coker
  5. Hydrocracked gasoil - VGO range material from the hydrocracker
  • Gasoline - one of the major petroleum products produced from processing crude oil in a petroleum refinery. Gasoline is one of the higher-valued light products (along with jet fuel and diesel). It is used almost exclusively in the transportation sector, mostly as a fuel in automobiles and other light-duty vehicles. Demand for gasoline varies seasonally with the highest demand during the Northern Hemisphere summer. Summer is also when gasoline quality specifications (especially vapor pressure) tend to be tightest, resulting in generally higher prices in these months. Generally, refiners will try to maximize their yield of gasoline, along with diesel, to maximize profit. Since the two products draw from different boiling range material, they are largely complementary. However, there are a few conversion units that favor one over the other, forcing refiners to make a call on which will be more value-creating. Most notably, FCCs will tend to upgrade VGO more toward gasoline, and hydrocrackers will upgrade VGO more toward diesel.
  • Hedging - the use of commercial contracts to reduce market risk exposure. Normally, a hedge consists of taking an offsetting or opposite position in a related security.
  • Henry Hub - a natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX). The hub is owned by Sabine Pipe Line LLC and has access to many of the major gas markets in the United States. The hub connects to four intrastate and nine interstate pipelines, including the Transcontinental, Acadian and Sabine pipelines. The Henry Hub pipeline is the pricing point for natural gas futures on the New York Mercantile Exchange. The NYMEX contract for deliveries at Henry Hub began trading in 1990 and is deliverable 18 months in the future. The settlement prices at Henry Hub are used as benchmarks for the entire North American natural gas market and parts of the global liquid natural gas (LNG) market.
  • Hub markets (oil) - large regional refining centers that tend to act as swing capacity for the global market and the location for most spot market trade in refined products. The three main hub markets are:
  1. Northwest Europe, centered around the refineries in the ports of Amsterdam, Rotterdam, and Antwerp (ARA)
  2. US Gulf Coast, centered around the refineries on the coast of Texas and Louisiana
  3. Singapore
  • Hub markets (gas) - natural gas hubs tend to be at the heart of gas infrastructure networks such as pipelines and liquefied natural gas (LNG) terminals. The hub is used as a central pricing point for the network’s natural gas. In some cases, a financial derivative contract is priced off gas delivered at this point as well.
  • ICE (Intercontinental Exchange) - one of the two main futures exchanges for crude oil and natural gas (the other being NYMEX). ICE is primarily known for Brent futures contract.
  • IEA (International Energy Agency) - branch of the OECD responsible for monitoring energy markets.
  • IMO (International Marine Organization) - an international treaty organization under the United Nations that establishes the Law of the Seas. Included in its mandate is the regulation of shipping fuels and emissions under the Marpol (Marine Pollution) convention. Under Marpol, the IMO regulates the sulfur limits for bunker fuel, a key product from oil refining.
  • Intraday - refers to price or exchange rate movements occurring within one day of trading. It is generally used to describe the high and low price of a commodity or the high and low exchange rate of a currency during a given trading day or session.
  • Jet fuel - one of the major petroleum products produced from processing crude oil in a petroleum refinery. Jet fuel is one of the higher-valued light products (along with gasoline and diesel). It is used primarily in the transportation sector. It is the primary fuel used in jet aircraft, but it is also used in other jet turbine applications. The same material used to make jet fuel is also sold as the product kerosene for non-aircraft uses, but with lower quality specifications. The kerosene used to make jet fuel has a boiling range in between gasoline and diesel range material. Consequently, jet fuel can be a swing fuel, stealing volume from gasoline and diesel when jet fuel prices are high, and contributing volume when jet fuel prices are low. There are a number of different grades of jet fuel for different uses and markets:
  1. Jet A-1 - The standard grade for international commercial aviation
  2. Jet A - The standard grade for US domestic aviation
  • Kerosene - a distillation cut primarily made up of molecules with 9 to 12 carbon atoms. The kerosene distillation cut has a boiling range between 330 and 550F. The primary use of kerosene is as a blend stock to make jet fuel. It can also be sold directly as kerosene fuel oil (No. 1 fuel oil), which goes by a number of names including stove oil, lamp oil, and range oil. A highly purified form of kerosene (white oil) is used in pharmaceuticals, cosmetics, and food products. Kerosene can also be blended in significant amounts into diesel fuel. The lighter end of the kerosene distillation cut can also be lifted into the heavy naphtha cut above to increase the volume of feed to the reformer. This is one lever that the refinery has to shift its yield away from diesel and toward gasoline. Also, if necessary, kerosene will be used as a cutter stock to reduce the viscosity of residual fuel oil. However, this results in a significant value downgrade for kerosene, versus its other uses, so will be kept to a minimum.
  • Light naphtha - can refer to either a finished product used as a petrochemical feedstock or a distillation cut commonly called light straight-run naphtha. It is composed of pentane and a slightly heavier material. Light naphtha comes from the distillation of crude oil or from the separation of NGLs in an NGL fractionation plant. Light naphtha from NGL fractionation is often called natural gasoline or pentanes plus. In a refinery, light naphtha is often blended directly into gasoline. However, its low octane and relatively high vapor pressure typically limit it to 5% or less of the gasoline pool. To boost its octane, it is often sent to the isomerization unit before gasoline blending. As a petrochemical feedstock, light naphtha is used in steam crackers to make ethylene and ultimately make plastics. In this use, it competes with propane and ethane as feedstock. Highly paraffinic naphtha is preferred in this use as it provides better yields than more naphthenic or aromatic naphthas.
  • LPG (liquefied petroleum gas) - refers to the lightest (lowest density) liquid fuels produced by a refinery, primarily C3s (propane) and some C4s (butane). As a product, it typically refers to commercial propane, which is primarily propane with a small amount of butane. LPG is commonly used as a fuel where it is valued for being easily transported and is easily vaporized at room temperature to form a fuel gas. In many underdeveloped markets, it is an important cooking fuel. In areas without the infrastructure to provide natural gas, it is often used as a home heating fuel. It is also used as a specialty light-vehicle fuel in forklifts and taxi fleets. Propane in its purer form also has other industrial uses. Propane is a major feed to steam crackers for the production of ethylene. Propane is used in farming as a drying agent for grain. LPG is also often used as refinery fuel if there is a limited ability to separate the LPG from refinery gas, or if there is a limited local market for LPG. However, separation for use in LPG blending is almost always a more valuable use if this option is possible. LPG (or commercial propane) typically contains ~90%+ propane and less than 10% butane.
  • LTO (light tight oil or shale oil or unconventional oil) - crude oil produced from thin, tight formations using unconventional production techniques including horizontal drilling and hydraulic fracturing. Light-tight oil production is concentrated in the US where it is the primary source of oil supply growth over the past few years. Major production areas include the Permian Basin in West Texas and the Bakken formation of North Dakota. LTO is generally a very light (API 45-50) and sweet (< 0.1% sulfur) crude grade.
  • Markets. Crude oil and refined products are bought and sold at points all along the oil value chain, from the wellhead to the final fuel consumer. However, when we speak of oil markets, we typically are referring to one of three key steps in the value chain:
  1. Spot market - The most important and active oil markets are the spot markets. This is where large physical parcels or cargoes of crude oil and the major refined products are bought and sold, mostly by oil companies and large trading houses.
  2. Wholesale (rack ) market - In many local markets, there is also active wholesale trade in oil products out of distribution terminals (at the Rack).
  3. End-user market - The end-user market for oil products includes both retail fuel sales and significant business-to-business sales to large fuel consumers such as airlines and railroads.
  • Mcf (thousand cubic feet) - a common measurement of volume for natural gas in the United States.
  • Methane - a simple hydrocarbon with one carbon atom and four hydrogen atoms. In a refinery, methane is produced in the refinery gas stream of many conversion units. It is also often purchased from outside the refinery as natural gas. Methane is generally consumed as a fuel in a refinery and is also used as a feedstock in hydrogen production.
  • Midstream - is the part of the petroleum value chain focused on the transportation of crude oil and refined products. It is usually defined to include:
  1. Movement of crude, NGLs, and product by pipeline, tanker truck, barge, tanker, and rail
  2. Storage of crude and product outside of refineries
  3. Fractionation of NGLs into components
  • MMBtu (million British thermal units) - a common measure of energy content for crude oil and refined products, and a volume measurement for natural gas.
  • Mont Belvieu - a major hub for NGL fractionation and trading, located on the US Gulf Coast outside of Houston, Texas.
  • MTBE (Methyl-tertiarybutyl-ether) a common blend stock into gasoline. It is valued both as a source of octane and as an oxygenate to reduce the carbon monoxide emissions from burning gasoline. MTBE is made from methanol (usually produced from natural gas) and isobutylene, providing a route for converting natural gas into higher-value gasoline. MTBE use is encouraged in some markets by gasoline regulations that require a minimum volume of oxygen to reduce carbon monoxide emissions. In this role, it competes with ETBE and ethanol. MTBE use is restricted in some markets over concern about its potential toxicity and its tendency to accumulate in ground water supplies when spilled. This has effectively eliminated its use in the US and Canada.
  • Naphtha is a broad term referring to distillation fractions and other intermediates in the gasoline boiling range. Typically, naphtha is categorized based on its boiling range as either:
  1. Light naphtha - Used as petrochemical feedstock, C5 isomerization feedstock, or directly as a gasoline blendstock
  2. Heavy naphtha - Feedstock to the reformer to make reformate for gasoline blending
  • Natural gas is a gas composed primarily of methane but typically with some ethane as well. Most natural gas comes directly from upstream oil and gas wells, not from refining. In refining, natural gas is often purchased and used as a refinery fuel and as a feedstock to make hydrogen in the hydrogen plant.
  • NGL (natural gas liquid) - are liquids separated from natural gas as the gas is processed either in the field or at gathering points before moving to market. NGLs are a mixture of light hydrocarbons including ethane, propane, butane, and light naphtha. The composition of NGLs varies. NGLs are typically transported to a fractionation plant for separation into the different components.
  • Nitrogen is an important contaminant in crude oil, typically in the form of organic nitrogen compounds. Nitrogen is a poison to many process catalysts and can also contribute to corrosion. Crudes with excessive amounts of nitrogen (greater than ~0.25%) require special processing.
  • Non-associated gas - natural gas that is produced from a natural gas well, rather than an oil well (associated gas).
  • NYMEX (New York Mercantile Exchange) - a commodities exchange with very active trade in oil commodities and derivatives. NYMEX light sweet crude (WTI) is a key market benchmark due to active spot and futures trading on the NYMEX.
  • NYMEX crude is the exchange-traded contract for WTI on the NYMEX commodities exchange. There is both an active spot and futures market for NYMEX crude, which has helped to make it (along with Brent) one of the major crude oil benchmarks.
  • Octane is one of the most important product qualities for gasoline. Specifically, octane is a measure of the tendency of gasoline to resist auto-igniting when compressed with air in a spark ignition (Otto cycle) engine. In a spark ignition engine, a mixture of gasoline and air is compressed in the engine's combustion chamber, before being ignited by a high-temperature spark. For efficient engine operation, it is important that the gasoline fuel mixture does not ignite before it is fully compressed. However, because compression raises the temperature of the mixture, some hydrocarbons do have a tendency to auto-ignite at the wrong time in the engine cycle. Octane is a measure of a hydrocarbon's resistance to doing this. Higher-octane materials are more valuable to a refiner because they allow the refiner to make higher-octane gasoline, which is priced at a premium. Also, high-octane material can be used to upgrade cheap, low-octane blend stocks and still achieve finished gasoline quality.
  • Oil sands - are deposits of oil in the form of small amounts of bitumen covering fine grains of sand. Oil sands are an unconventional source of oil production. It requires either mining of the sands and separation of the bitumen using hot water, or injection of steam into the wells in the oil sands deposits to free the bitumen so it can be pumped to the surface.
  • OPEC (Organization for Petroleum Exporting Countries) is the organization that coordinates crude oil production levels for the major crude-exporting countries, in an effort to balance global crude supply and demand to maintain market stability.
  • Panamax refers to a class of oil tanker smaller than Aframax. Panamax tankers are in the range of 60-80 DWT. They are used for crude oil and refined product shipment. If moving products, they are often called LR1. The name comes from the size limit created by the original design of the Panama Canal.
  • Paraffins are straight- or branched-chain hydrocarbons (i.e., they do not contain naphthene or aromatic rings). In a refinery, a paraffinic hydrocarbon will tend to crack well in a cracking unit (e.g., FCC) and will have higher cetane when blended into diesel, especially if it contains more straight chains and fewer branches. Likewise, it will tend to perform poorly in a reformer and would make a poor (low-octane) gasoline blendstock.
  • Petrochemicals generally refer to the petroleum-derived, commodity chemicals used primarily in the production of plastics and fibers. Most of the feedstocks for petrochemicals come from refining and NGL processing, including ethane, propane, butane, naphtha, and aromatics.
  • Pipelines are used to transport crude oil, natural gas, refined products, and some intermediate streams. Pipelines are generally favored for long-distance movements (more than 100 miles) over land, where they have a cost advantage over other land transport such as rail or truck. Pipelines are typically dedicated to moving either crude oil or refined products. However, within these categories, it is common to batch shipments of different types. There are some pipelines that move crude and refined products in the same line.
  • Price assessment is the determination of the prevailing market price for crude oil, natural gas, or refined products at a point in time. The most important price assessments are for the spot market, as these are the best indicators of overall market conditions and are used as the benchmarks for many crude and product transactions. Price assessment is performed by a number of price assessment agencies. The most important being: Platts, Argus, and OPIS. These agencies assess and publish prices on a daily basis based on observed transactions and/or player postings. Each has its own method for collecting transaction data, judging which transactions to include, adjusting for differences (e.g., quality, location, deal size), and reporting prices to the market.
  • Pricing basis. Standard terms for an oil or LNG cargo will include specified transportation loading arrangements such as:
  1. FOB – Free Onboard - loaded onto a ship and ready for transport, but not including the costs associated with transport;
  2. CIF – Cost, Insurance, Freight - onboard a ship ready for receipt at the delivery point, with the cost of transport already built into the price, including insurance;
  3. C&F – Cost and Freight - onboard a ship ready for receipt at the delivery point, with the cost of transport already built into the price, but not including the cost of insurance
  • Propane is the lightest liquid stream produced in a refinery. The propane molecule has three carbon atoms and 8 hydrogen atoms. In refining, propane is typically blended into finished products (LPG and propane for petrochemical feed) to make ethylene or propylene. It is also sometimes used as refinery fuel but this is typically its lowest value end-use. Propane comes from many different process units in the refinery, as well as from outside sources such as natural gas plants (from separating NGLs).
  • Propylene is a three-carbon olefin, basically propane with one double bond. In a refinery, propane is important as a feedstock to the alky unit to make C3 alkylate for blending into gasoline. Propylene is also often separated and sold as a feedstock to the petrochemicals industry to make polypropylene plastics. Refinery propylene primarily comes from the FCC unit. Small amounts of propylene are also produced from other cracking units, such as the coker, but these are less likely to be separated for use in the alky. Propylene can also be produced on purpose by dehydrogenating propane, but this is not typically done in a refinery. In the absence of an alky unit, the typical disposition of propylene is in LPG blending or refinery fuel, both very low-value options.
  • Put option - a forward contract that allows the buyer to sell a commodity in the future at a designated price, in exchange for paying a premium. A put option is essentially a bet that the actual market price in the future will be below the designated price (minus the cost of the premium).
  • RBOB is a common grade of gasoline produced by refiners in the US. It gets its name from being a reformulated grade of gasoline ("R") that has tighter environmental specifications than conventional gasoline, and its use is mandated in many urban areas with air quality issues. RBOB is a "BOB" (before oxygenate blending) because it is formulated for subsequent blending with 10% ethanol to form the final gasoline blend that is marketed to end users.
  • Refined products, also known as petroleum products are the outputs of a petroleum refinery. A typical refinery produces a wide variety of different products from every barrel of crude oil that it processes. Generally, refineries operate to make as much of the high-value light products (gasoline, jet fuel, and diesel) that they can, with the other products acting essentially as by-products. Some of the major products from a typical refinery are:
  1. Propane - Used as a feedstock for ethylene cracking, or blended into LPG for uses as a fuel
  2. Butane - Used as a feedstock for ethylene cracking, or blended into LPG for uses as a fuel
  3. LPG (liquefied petroleum gas) - A blend of propane and butane used as fuel
  4. Light naphtha - Used as feedstock into ethylene crackers
  5. Gasoline - Used as a transportation fuel for passenger cars and light trucks
  6. Aviation gasoline - Used as an engine fuel in light aircraft
  7. Jet fuel - Used as a fuel for jet aircraft
  8. Kerosene fuel oil - Used as residential cooking, heating, and lighting fuel
  9. Diesel - Used as a fuel for heavy-duty trucks, trains, and heavy equipment
  10. Industrial gasoil - Used as a furnace fuel in industrial plants and commercial/residential heating (heating oil)
  11. Residual fuel oil - Used as a fuel in power generation and for large ocean-going ships (bunker fuel)

Many refineries also produce specialty or non-fuel products such as:

  1. Asphalt - Used to pave roads and in the manufacture of building materials (e.g., roof shingles)
  2. Base oils - Used to make lubricating oils for use in industrial machinery and vehicle engines
  3. Propylene - Can be separated for sale to the petrochemicals industry
  4. Aromatics - Can be separated from reformate for sale to the petrochemicals industry
  5. Wax - Extracted from lubricating oil and either sold as a feedstock to specialty wax production (as slackwax) or treated at the refinery to a finished wax product.
  6. Grease - Used as a solid lubricating oil, mostly in industrial uses
  7. White oil - A colorless, odorless, tasteless oil used by the food, cosmetics, and pharmaceuticals industries
  8. White spirit - Naphtha range material used as an industrial or household solvent
  9. Sulfur - A contaminant when present in other products, but once separated, it can be sold as a feedstock to the petrochemicals industry
  10. Pet coke - A by-product of the coking process that can be sold as a fuel for power plants and cement plants or to manufacture electrodes and anodes
  • Refinery fuel refers to all of the fuel used within a refinery to feed furnaces and provide heat to process units. Most of the process units in a refinery require the input of heat either from a furnace in the processing unit or from heat generated in furnaces elsewhere in the plant and sent the unit in the form of steam. The fuel used in the furnaces typically includes all of the refinery gas generated in the refinery, supplemented with either purchased natural gas or low-value intermediates (propane or resid) generated in the refining process
  • Refinery gas refers to the lightest hydrocarbon stream produced from refinery process units. It is typically made of methane and ethane, cut can also have some propane, butane, and hydrogen in it. Refinery gas is typically consumed in the refinery as fuel. Rarely would a refinery sell refinery gas as a finished product.
  • Refining. A petroleum refinery is a processing plant that converts crude oil into a mix of different finished petroleum products. The profitability of a refinery comes from the difference in value between the crude oil that it processes and the petroleum products that it produces. Most of a refiner's margin comes from the higher-value "light products" (i.e., gasoline, diesel, and jet fuel) that it makes. However, refineries also, unavoidably, produce some lower-value products (such as fuel oil) in the process. Some refineries also generate incremental value from producing some small-volume specialty products. To increase their margins, many refineries have invested in conversion units to increase their ability to run cheaper, low-quality crudes and/or to increase their yield of high-value products. However, this comes at a high capital cost. There are currently over 600 operating refineries in the world, operated by over 200 refining companies.

How a refinery works

There are four main steps in the oil refining process.

  1. The most basic and common step is distillation, where crude oil is separated into its component parts or distillation cuts. This is typically done in a two-stage process: atmospheric distillation then vacuum distillation.
  2. Next, these distillation cuts are further processed through conversion units to transform them into a more profitable mix of products. A typical refinery has 5-10 different conversion units, such as an FCC or coker. These allow the refinery to produce a mix of petroleum products that is more valuable than the mix that occurs naturally in crude oil. Many of the outputs from one conversion unit are also then fed into another conversion unit.
  3. Next, refiners employ treating units such as hydrotreaters to improve stream qualities and to remove contaminants.
  4. Finally, refiners blend different streams to create batches of finished refined products meeting the exact quality specifications that the market wants.
  • Reformulated gasoline - is the gasoline grade in the US required in many urban areas with poor air quality.
  • Renewable fuels standard (RFS) - The RFS is the regulation in the US mandating the use of renewable fuels (e.g., ethanol and biodiesel) in domestic fuel. The RFS is administered by the EPA, which defines the regulations for compliance and sets the annual mandate levels for various classes of renewable fuels. The RFS uses RINs (renewable identification numbers) to measure and record compliance. RINs are created when renewable fuels are blended into the fuel supply, can be traded once created, and must be submitted to the EPA by refiners and importers of fuel to meet their compliance obligation under the RFS.
  • Residual fuel oil (Also known as: resid, No. 6 fuel oil, heavy fuel oil, 6 oil). Residual fuel oil is one of the lowest-value petroleum products from a refinery. It is essentially a by-product of producing the light products that are the primary focus of a refinery. The primary end-use for residual fuel oil is as a fuel in simple furnaces such as power plants and industrial boilers. It is also the primary fuel used on ocean-going ships, where it is called bunker fuel. Nonetheless, residual fuel oil has some quality specifications that it must meet, for performance and environmental reasons. The most important are:
  1. Viscosity - This is a measure of a fluid's tendency to resist flow. Lower viscosity is more desirable

  2. Sulfur content - Fuel oil has a maximum sulfur content determined by environmental concerns. This is typically set as a maximum sulfur content in wt %.

Residual fuel oil is the heaviest among a range of different fuel oil grades.

  • Salt. Crude oil often contains salts that can result in corrosion when processed through a refinery. Salt in crude oil is typically in the form of salt crystals dissolved in the water that is emulsified in the crude oil. The most common salts are chlorides of sodium, calcium, and magnesium. Salts are typically removed in a desalting unit before crude is sent to atmospheric distillation. High concentrations of salt in a crude oil grade will affect its market value because of the additional cost of processing it.
  • Salt dome - a geologic structure consisting of a deep layer of pure salt. Salt domes are used for crude oil, natural gas, and refined product storage by hollowing out a cavity in the salt structure (by pumping water into it) and filling the space with crude or product.
  • Sour (high sulfur). In refining, a crude oil grade is called sour if it has a high sulfur content. As opposed to a sweet crude, which is one with very low sulfur content. Typically, a sour crude would be one with anything over 1% sulfur content, by weight.
  • Spot charter – a one-off chartering of a tanker for a single voyage. This is in contrast to a time charter, which is for an extended period of time including multiple voyages.
  • Spot market. The spot market for crude oil and refined products refers to the trade of large physical cargoes or parcels in one-off transactions for near-term delivery. While this market accounts for a small portion of overall crude and products transactions, it plays a critical role in setting prices for most other transactions. Most buying and selling of crude and products happens under term contracts. However, most of these contracts rely on the pricing reported in the spot market as the basis for their pricing. The buyers and sellers in the spot market are primarily crude producers, refiners, professional trading firms, and large distributors or consumers of oil products (e.g., large fuel retailers, airlines, fuel wholesalers). Trades are typically done through direct one-to-one interaction of traders by phone, text, or through online exchanges. While the transactions are one-off deals, they tend to be highly standardized in terms of:
  1. Location – Where the cargo or shipment will physically change hands
  2. Cargo shipping basis – FOB, CIF
  3. Mode of oil transportation – A tanker cargo, a barge load, or a pipeline shipment
  4. Deal timing window – Period in which the transaction must be completed

Prices for these trades are assessed by third-party price assessment agencies (Platts, Argus) and are generally published as a daily spot price assessment. These published spot prices are the basis that most term contract prices are indexed to. Spot transactions are for the exchange of physical crude or product volumes at a specific location. Crude transactions are typically at the point of loading onto a tanker or into a pipeline near the production region (FOB). Product transactions are typically at a major refining or transportation hub. Examples include:

  1. US Gulf Coast – Centered around the Houston refining center, and sometimes including New Orleans, Corpus Christi, Lake Charles, and Beaumont/Port Arthur
  2. NWE (Northwest Europe) – Centered around the port of Rotterdam, and sometimes including Amsterdam and Antwerp (called ARA)
  3. Singapore
  4. New York Harbor - In or near the port of New York and New Jersey
  5. Mediterranean – Including the ports of Genoa (Italy) or Lavera (France)
  • ‚ÄčSuez Canal is a major transportation corridor for both crude oil and refined products, connecting the Mediterranean with Asian markets.