Definitions

To expand your understanding of trading in general and of commodities and forex 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.


  • 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 AmsterdamRotterdam, 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.
  • 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.
  • 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 BrentTapis, 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.
  • 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.
  • 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.
  • Non-associated gas - natural gas that is produced from a natural gas well, rather than an oil well (associated gas).
  • Rig CountIn order to produce natural gas, you need to find it. The search for reserves is referred to as exploration. Exploration involves a preliminary assessment of geological structures of interest, often using seismic technology. Fleets of drilling rigs of various types then deployed to potentially viable areas to locate and ultimately extract natural gas and oil. Exploration results in production, and production impacts prices. There is often (but not always) a direct feedback of prices to the exploration process - lower prices should reduce the incentive to explore. The number of rigs, which are active at any given time, the rig count, is a commonly discussed statistic as many consider it to be a leading indicator of future production and, therefore, price changes. Although rig count continues to mesmerize market participants, it is not clear that it is a particularly useful statistic from a trading perspective. We deliberately do not superimpose oil/natural gas prices on the charts showing oil/gas rig count as we do not want to imply that there is a strong correlation between the rig count and the price. Indeed, there are reasons to believe that rig count and prices may only be loosely correlated. Rig count is one step removed from the setting of market prices: production responds to rig count, and price responds to production, not to mention demand and inventory level. In addition, improvements in rig technology means that newer rigs are more efficient than older ones, endowing the rig count statistics with an inherent non-stationarity. Complicating matters further is the fact that drilling is not always followed immediately by production. To track production swings more accurately, fundamentals such as wells completionsDUC movementinitial production (IP) rates and declining history provide a more accurate approach. Overall, rigs should mainly be used to analyze future development interest and plans but not near-term production swings.
  • Sulfur (content) - an element commonly found in crude oil and petroleum products. Sulfur is considered an undesirable contaminant because, when burned, it generates sulfur oxides. Consequently, most finished petroleum products have a limit on how much sulfur they can contain, making sulfur removal an important part of the overall refinery process. Sulfur can also harm some of the catalysts used in refining process units so it must be removed from some intermediate streams before they can be fed to a conversion unit. As a general rule, a crude oil grade with high sulfur content will have a lower value. This type of crude is often referred to as a sour crude. Most of the sulfur in crude oil is removed during processing. Some of it is removed in conversion processes as hydrocarbon molecules that contain sulfur are cracked and form H2S. Sulfur is also removed directly by processing a hydrocarbon stream through hydrotreating, where the sulfur in the hydrocarbon is replaced with a hydrogen atom, and the released sulfur is combined with two free hydrogens to form H2S gas. H2S gas is typically collected from the various conversion and hydrotreating units and converted into elemental sulfur in a sulfur plant. Once separated, sulfur can be sold as a low-value sulfur product, either as solid sulfur or in a molten state. The major use for sulfur is in the petrochemicals industry to produce sulfuric acid.