Energy Trading

What is crude oil?

Hydrocarbon mixture found underground, extracted from land or sea (offshore rigs).

What are the four main steps in the oil product chain?

• Extraction (drilling)

• Transportation (pipelines, etc.)

• Distillation/refining

• Distribution to consumers (e.g., gas stations)

Where is a lot of oil extraction done (for the U.S. and globally)?

Texas (U.S.), Venezuela, Saudi Arabia (and other Middle Eastern producers).

What happens at the distillation/refining stage?

Crude oil is heated so different components evaporate at different temperatures, producing gasoline, kerosene/jet fuel, plastics feedstocks, asphalt, etc.

What is a crude oil benchmark?

A standard grade of crude used as a reference price for many other oils (like indexes for the oil market).

Name three important crude oil benchmarks.

• Brent (Europe-focused benchmark)

• WTI – West Texas Intermediate

• Dubai benchmark (for Middle Eastern/Asia markets)

What is WTI (West Texas Intermediate)?

A benchmark price for oil produced in West Texas; widely used as a reference for U.S. crude prices.

Why is WTI a convenient benchmark?

Because prices are quoted at/near a major production and pipeline hub. As you move farther from the drilling/hub, prices typically rise due to transportation costs.

What is contango in oil markets?

Market structure where the futures price of oil is greater than the current spot price.

Why does contango usually happen?

Because it costs money to store oil; futures prices embed storage, financing, and risk costs.

What is backwardation in oil markets?

Market structure where the futures price of oil is below the current spot price.

What is the spot market?

Market for immediate or very near-term delivery (e.g., one-day delivery).

What is the futures market (for oil)?

Market where contracts are traded for delivery at a future date (e.g., one month out).

What is a transportation arbitrage in oil?

Exploiting price differences between locations after accounting for transport costs.
Example: WTI = $60, Houston = $65, transport cost = $2 → $3 profit potential.

What is a storage/time arbitrage in oil?

Exploiting the price difference between spot and futures after storage costs.
Example: Spot = $60, 1‑month future = $65, storage = $2 → $3 profit potential.

What is a refinement arbitrage in oil?

Exploiting the margin between crude and refined products after refining costs.
Example: Crude = $60, refined output value = $65, refining cost = $2 → $3 margin.

Name major risks that affect oil markets.

• Government policy changes

• War/geopolitical conflict

• Physical disruptions (e.g., pipeline failures, bursts)

How is natural gas produced?

Drilled similarly to oil; also often a byproduct of oil drilling.

What is the basic product chain for natural gas (high level)?

• Production/processing

• Transportation via pipelines or ships

• Liquefaction for shipping, then regasification

• Delivery into local pipeline networks/consumers

How is natural gas transported over land?

Primarily through pipeline systems.

What is liquefaction (for natural gas)?

Cooling natural gas to a liquid (LNG) to greatly reduce its volume for shipping.

What is regasification?

Reheating LNG back into gaseous form so it can enter receiving countries’ pipeline systems.

What is an LNG carrier?

A specialized ship that carries liquefied natural gas overseas.

What happens at Sabine Pass, Louisiana?

It is a major U.S. LNG export terminal where gas is liquefied and loaded onto LNG carriers.

What is the main U.S. benchmark for natural gas?

Henry Hub in Louisiana, where many natural gas pipelines intersect.

Why is Henry Hub important?

It serves as the key pricing point for U.S. natural gas futures and spot prices.

Where else does significant natural gas activity/trading occur (from your notes)?

Omaha, Nebraska (regional hub/market activity mentioned in your notes).

What are the main uses of natural gas?

• Heating homes and buildings

• Power generation (electricity)

What are key factors influencing natural gas demand?

• Weather and seasonality

• Highest demand during very hot (AC load) and very cold (heating) seasons.

How is natural gas trading linked to weather?

Traders use weather models to forecast demand and price movements.

How is natural gas shipped internationally?

Otherwise: gas is liquefied (LNG) at export terminals, shipped on LNG carriers, then regasified at import terminals and injected into the receiving country’s pipeline system.

Why might someone be interested in energy trading?

• Mix of physical markets, geopolitics, and quantitative trading

• Impact on real economy (power, fuel, heating)

• Volatile, data‑driven markets with many arbitrage opportunities (transport, storage, time spreads, etc.)

What is OPEC+?

Organization of Petroleum Exporting Countries plus some allies; an oil‑producing cartel that coordinates production to influence global oil prices.

What does OPEC+ do in practice?

They collude/coordinate on how much oil to produce to manage supply and support desired price levels.

Name some key OPEC or OPEC+ countries mentioned.

As a check/balance or counterweight to U.S. economic power in oil markets.

How can OPEC+ be seen relative to the U.S.?

As a check/balance or counterweight to U.S. economic power in oil markets.

Crude vs. Refined Products

Crude: unprocessed oil from the ground.
Refined: products like gasoline, diesel, jet fuel, plastics feedstocks, asphalt.

Contango vs. Backwardation (one-line)

• Contango: futures > spot

• Backwardation: futures < spot

Henry Hub vs. WTI

• Henry Hub: U.S. benchmark for natural gas in Louisiana.

• WTI: U.S. benchmark for crude oil in West Texas.