Crude Oil Prices: Crude oil prices are much debated these days. It is being said that oil prices are under control, but the reality of India’s oil refineries is completely different. Officials of refinery companies say that compared to the ‘future price’ (future deal) of crude oil, they have to spend a lot of money to buy actual oil (physical crude). On Monday, the price of crude oil in the futures market was around $108 per barrel. However, when companies actually go to the market to buy oil for their refineries, they have to pay a hefty premium. The biggest reason for this is believed to be the decrease in the supply of oil from the Gulf countries.

A large difference in present price compared to future price

The latest data from the US Energy Information Administration (EIA) has clarified the entire picture. If we look at the data between September 1 and 22, the Brent spot price (the price to buy oil immediately in the market) is on average $ 12 per barrel higher than the Brent futures price in November. On September 15, the difference between these two prices widened to $22. In the second fortnight of the same period, spot prices remained above the futures rate by more than $15 for several days. In fact, EIA’s spot price serves as a benchmark for the physical Brent market. This is the market where crude oil cargoes (vessels) are actually bought and sold.

Suppliers are demanding huge premiums

Top executives associated with the industry have clarified that the future prices we are currently seeing on the screen do not reflect the actual state of the physical market. The situation is that oil suppliers are demanding a premium of up to $20 per barrel over the futures price. Currently there is a huge shortage of oil in the physical market. According to experts, the supply of oil from the Gulf countries is limited, due to which the suppliers are acting according to their wishes. Due to this reason Indian refineries are forced to buy oil at higher prices.

The physical market is completely different from the futures market

To understand this difference, we have to understand the mathematics of the November Brent futures price. This is a standardized contract, under which trading takes place in the futures market for delivery in November. Most people participating in the stock market use these contracts only to predict price fluctuations or to reduce (hedging) their risk. Their purpose is not actually to take delivery of crude oil. On the other hand, prices paid by refineries are linked to physical-market benchmarks. The final price of oil is determined based on the average of the months in which oil is to be loaded on the vessel. Also, the prices vary slightly depending on the quality (grade) of the oil. This simply means that when the price rises in the physical market, the raw material of the refineries becomes more expensive, even if the future price appears lower on TV.

The entire process from purchase of crude to delivery

The process of buying crude oil is also very long. Generally, the purchase deal is finalized about two months before the delivery of the oil. For example, if a refinery bought cargo in September, it would be loaded onto a ship in October. After this, the cargo will reach the refinery in November. The price of oil in this entire deal will be determined by the average benchmark which will run in October (month of loading). Therefore, the ‘headline price’ (future price) has no direct relationship with the actual price of oil at the time a refinery enters into a deal to buy oil. This is the reason why even though oil is cheap on paper, it is burdening the pockets of refineries.