21 Essential Terms to Trade Oil – Introduction
Crude oil is one of the most important industries to trade. This is because of its liquidity and the dynamism in the industry. In crude, you can always expect new news every day.
To become an exceptional oil trader, it is very important to understand several terminologies. Here are the top ones you need to know.
- Upstream – This refers to the exploration and production of crude oil. As you probably know, oil companies spend a lot of time exploring for the resource. Once they find a location and test it, they mine it. All these activities are referred to as upstream activities.
- Midstream – This refers to the process where the crude and other hydrocarbons are processed, stored, marketed and transported.
- Downstream – This is the final step where crude oil is manufactured, sold and distributed to the end users.
- Brent – This is the global benchmark for crude oil. Brent is usually traded in the United Kingdom.
- WTI – This refers to the crude oil which is sold in the United States. WTI stands for West Texas Intermediate.
- Fracking – This is a technology pioneered in the United States. In traditional oil production, wells are dug vertically. In fracking, the wells are dug vertically, and then horizontally. Then, a mixture of water and chemicals is pumped under high pressure. This method allows oil and gas companies to produce more oil.
- Condensate – A mixture of hydrocarbons which are in a gaseous state under reservoir conditions and, when produced, become liquid under reduced temperature and pressure.
- Sweet Oil – This is crude oil that contains little or no Sulphur content.
- Sour Oil – Sour oil has a total sulfur level greater than half a percent.
- Heavy Oil – This is crude oil with an API gravity of less than 22 degrees. It does not flow easily because of its elevated gravity.
- Proved – In exploration, this refers to when the explorers are 90% certain that crude deposits are commercially viable for extraction.
- Probable – This is when the reserves have 50% chances of commercial extraction.
- Possible – These are reserves with at least 10% certainty of commercial extraction.
Together, the three are known as the 3Ps of exploration.
- Dry Hole – These are wells that cannot produce economically viable crude oil resources.
- Directional Drilling – This is an ancient method of oil production where the miners drill at an angle making it easy for them to get to the resources faster.
- Vertical Drilling – This is when the drillers drill a well in a vertical direction. This is the easiest form of drilling. However, its use is limited and is generally less productive.
- Hydraulic Fracturing – This is the method of drilling where a vertical well is dug and then, horizontal channels are dug.
- NPV – This is the synonym for Net Present Value. It simply means the total present value of all oil found in a well. It is calculated by multiplying the amount of oil by its dollar value.
- BBL – Barrel of oil. It is made up of 42 gallons.
- BBL/D – This is barrels of oil per day.
- BOE – Barrel of Oil Equivalent. It is a unit of energy based on burning one barrel.
Understanding these terminologies will help you navigate the field of crude oil with ease. If you are a WTI trader, you should also look at the US’ oil basins.