What is WTI Crude Oil?
WTI stands for West Texas Intermediate, is one of the most prominent crude oil benchmarks. It is the lightest form of crude oil and sweetest among all crude oil benchmarks due to the least sulphur content. Sometimes it is also referred to as Texas Light Sweet or US Light crude. It is among the top two most traded oil benchmarks.
Insights about WTI Crude Oil:
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Since the standard and use of crude oil by the end-user depends on the quality of crude, which is ultimately dependent on the oil field from where it is explored. Let us try to understand the basic concept involved in the quality of crude oil.
The formation of crude oil takes millions of years. As per the widely accepted theory of petroleum generation, plant and animals' remains get deposited under the sediment cover. With time, the organic matter from plant and animals gets converted into petroleum with induced pressure and temperature.
The quality of generated crude oil is directly related to the maturity of organic matter. The impurities present in the crude is dependent on the source and reservoir rocks, the place where crude oil is generated and stored. If organic matter's maturity is more and the level of impurities is less, one will get light oil and sweet oil.
The demand for light and pure crude oil is relatively more in the international market than other crude oil benchmarks. WTI is the lightest and sweetest for crude oil primarily explored from Texas, North Dakota and Louisiana and transported to Cushing, a major spot for oil.
Which are the other key crude oil benchmarks?
There are two other kinds of crude petroleum benchmarks broadly utilized: Brent Crude and OPEC Reference Basket.
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Brent is produced from the oil fields of the North Sea. It is the second lightest type of unrefined petroleum. Brent is formed by the blend of four crudes, the Forties, Brent, Ekofisk and Osberg. The third one is the OPEC Reference Basket, the weighted average price of petroleum blends produced by OPEC nations.
WTI Vs Brent Crude:
The massive difference between Brent and WTI is the source from where they start. WTI crude oil is found in the US landlocked oil fields, while Brent crude is produced from the North Sea fields, hence accounts for relatively fewer transportation costs. Brent is relatively priced higher than WTI because the WTI benchmark is limited to the US, whereas Brent crude benchmark is followed by two-third of the world for trading. Recent technical advancement like horizontal well drilling and hydrofracking also contributed to the price variation.
However, the price trend used to be the opposite before the US shale oil revolution. The prices of WTI used to be higher than Brent crude.
Why is WTI priced lower than Brent?
Theoretically, WTI is lighter and sweeter than Brent so, it must be priced higher, but actually, a vice versa situation is noticed in the market. WTI futures contracts have to be settled physically and expire each month. The buyers need to take the delivery from the Cushing. Numerous buyers don't have a storage facility, and they directly sell the incoming crude in the market. During the low demand phases, like during the COVID period, the demands were extremely less, and there were no buyers in the market. All the Cushing storage were full, and buyers were not taking the delivery, so the sellers were selling the WTI crude at remarkably lower prices. However, the case is not valid with Brent crude. Hence, the prices of WTI crude are more volatile than Brent crude.
Another important factor is Brent is settled in cash. Any investor can hold the contracts beyond their expiry as an added advantage, and no one forces to sell them.
Apart from this, WTI crude is extracted from landlocked areas hence require extra transportation cost for storage. In contrast, Brent is extracted from fields present in the North Sea; it can be directly stored in the carriers or instantly transported.
What happened to WTI Crude Oil prices in April 2020:
The May delivery contract of WTI crude oil futures fell more than 300 per cent at negative US$37.63 per barrel in April 2020. In futures contracts, the buyer pays some money as an assurance to take delivery of a commodity on the day of contract expiry, but if the speculator doesn't intend to take the delivery can exit the position before expiry. Speculators can sell out or reverse out the contract to someone else, or they can roll-over the contract by buying contracts for one of the coming months.
However, if the speculator decides to keep the contract, they have to take the physical delivery from Cushing, Oklahoma, on expiry. The oil glut situation arisen by the worldwide lockdown has resulted in a shortage of storage space. Since all the storage space around the globe were full, storage cost for offshore and onshore have soared in the particular month, with tankers costing around US$165,000 per day.
Divergence in WTI and Brent Crude oil prices:
WTI and Brent's prices started to diverge first in 2011; however, they again converged in late 2014. The other major divergence was observed in 2020 when WTI went into negative territory. There are various reasons which are considered to be responsible for the divergence. Some believe that a glut of WTI crude is the main reason for divergence, whereas others believe that depletion in the North Sea's Brent oil is the main reason for divergence. However, the lack of supply measures of WTI crude from landlocked areas prompted Brent to be adopted as the leading oil benchmarks even on the US and Canada's east coast. WTI crude is transported on rails which is relatively more expensive than by pipelines.
WTI Crude Trading:
WTI crude oil is traded on the Chicago Mercantile Exchange (CME) under the ticker CL.
What are the Factors of Production? Production of anything requires inputs to produce an output, and the inputs used in the production are known as factors of production. Alternatively, these are resources used in the production of goods and services. Factors of production are also critical to economic growth given the economic growth requires expansion in output/national income or total production. Factors are a class of productive elements, which individually are known as units. Units are interchangeable and homogenous, moreover, they are perfect substitutes for each other. Factors, which constitute a group of units, are not a perfect substitute for each other. Modern economists prefer using ‘inputs’ instead of conventional factors of production: land, labour, capital and entrepreneurship. Classification of Factors of production Land Land includes all the natural resources available such as water and air. It constitutes a natural resource that yields income and is exchangeable for a consideration. In the absence of land, water and sun, a farmer cannot produce crops. Every commodity traded in the world can be traced back to land directly or indirectly. Such as gold is extracted from mines, crude oil is explored and extracted from oil fields, grains are produced in agricultural land. Moreover, the land is arguably the ultimate origination of commodities. Meanwhile, the quantity and quality of land are vital to yield an acceptable utility for the user. But the availability of land does not guarantee economic growth because the ability to use resource determines the optimal use of the resource. Land can be further classified as renewable and non-renewable. Renewable resources can be used again and again in the production like an agricultural land used year after year for the cultivation of food, grains etc. Non-renewable land is not usable again and again and is exhausted as the consumption increases. A gold mine may not yield additional income for a business when ore reserves are exhausted. And a new discovery would provide additional resource. Land, as a blessing of nature, is fixed in supply. Whether the demand increases or decreases, the supply of land will remain the same. As a result, it is not dependent on the price, therefore supply of land is perfectly inelastic. Labour Labour does include not only physical but also mental abilities that are done by humans for a monetary benefit. The contribution of labour depends on the size and quality of labour. For instance, Japan has been successful in the production of small and compact cars, while the US producers were efficient in slightly heavy cars. Higher productivity of labour will likely deliver favourable benefits. As a human factor, labour cannot be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot be separated. Labour is available in return of wages and is not a saleable commodity. While one cannot store labour for future use, the supply of labour is dependent on the need for production. Labour supply is elastic, and it takes time to develop overall supply. Division of labour emphasises on the speciality of labour in a particular work. Every labour group in an organisation is further classified into various divisions, depending on the quality, skills, knowledge and demand. Capital Capital is a critical factor of production and largely means wealth, which includes stock of raw material, machinery, tools, building etc. It is also the money available for productive and investment purposes. Capital also extends to physical assets such as machinery, raw material that are directly used in the production. Securities such as shares and bonds are not classified because they are not used in production, thus not the factor of production. It is largely classified into fixed capital and working capital. Fixed capital is used in the production continuously and incur wear and tear. Fixed capital does not mean it is immovable, but the essence of fixed is the cost incurred, which largely remains fixed over the period of production. The cost incurred in working capital is, however, recovered when the product is sold. Such as the cost of raw material, along with other inputs, is a component of the total cost of the good. Capital also includes human capital. Human capital is also a vital unit of production and means the education, skills, and health of people. It is essential for the improvement in productivity. It is now understood that investments in human capital provide favourable growth. Entrepreneurship Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty associated with the production. Now it is understood that production is a function of land, labour, capital, and entrepreneurship. Entrepreneurship is more concerned with the incorporation of production, rather business affairs, which are managed by other people working on wages. Therefore, an entrepreneur takes the risk and uncertainty associated with production. An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling the factors of production, including land, labour, capital and entrepreneurship. Innovation and development are also associated with entrepreneurship. Entrepreneurs undertake crucial decision of capital allocation, which may include setting up new factors, purchasing machinery, upgrading skills of human capital, innovating units of production etc. Elon Musk is an entrepreneur aspiring to reach mars, produce e-vehicles, launch space travel. He is effectively managing and bringing about the factor of production to achieve results.
Ichimoku Kinko Hyo is a versatile technical indicator used to identify trends, support and resistance, gauge momentum, and to generate buy or sell signals. The name of the indicator translates into “one look equilibrium chart”. Must read: What Is Technical Analysis? The indicator reflects on all of the above parameters by taking multiple averages into consideration and plotting them on a chart, and the interpretation of the chart is factual in nature, i.e., it remains the same irrespective of the time frame. Originally developed by a Japanese journalist – Goichi Hosoda in 1960s, the indicator provides more data points as compared to the traditional candlestick chart, and it could be applied on any type of chart, irrespective to the chart’s own data points, i.e., the chart could be a bar chart, a candlestick chart, or a simple line chart. While at first glance the indicator could seem intimidating and highly technical to novice traders or investors. However, the indicator is relatively easy, and once a trader understands the nitty-gritty of its derivation and implications, it could become quite handy to gauge the market sentiment. Moving Parts of Ichimoku Kinko Hyo The Ichimoku Kin Hyo mainly contains two short-term moving averages- the conversion line (kenkan sen) and the base line (Kijun sen), one medium-term average – Leading Span A (senkou span A), one long-term moving average – Leading Span B (senkou span B), and a historical closing plot – Lagging Span (chikou span). Derivation of Components The conversion line of the indicator is derived by taking the mean value of 9-period high and low. Likewise, the base line of the indicator is derived by taking the mean value of 26-period high and low. The leading Span A is typically the mean value of the conversion line and the base line. The leading Span B is the mean value of 52-period high and low. And the lagging Span is the close plot of 26-period in the past. Cloud 1 – Span A crosses above Span B. Cloud 2 – Span A crosses below Span B. In the definition, we mentioned that the Ichimoku Kin Hyo is factual in nature; thus, in the derivation section, we have used PH and PL notions. The period here could take any from, such as daily, weekly, monthly. So, if we are applying Ichimoku kin Hyo on the daily chart, the PH and PL notion would consider 9-day high and 9-day low. Likewise, if are applying the Ichimoku Kin Hyo indicator on a weekly chart, the PH and PL notion would consider 9-week high and 9-week low, and so on. Interpretation For interpreting signals from the Ichimoku, the first thing which should be considered is the crossover between the conversion line and the base line along with relative position of Span A and Span B. When the conversion line crosses above the base line from below, it is typically considered as a positive signal, and when the conversion line crosses the base line below from above, it is considered as a negative signal. Furthermore, if the positive crossover between the conversion line and the base line takes place above Span A, it reflects on the strength of the trend towards upward. Likewise, if the negative crossover between the conversion line and the base line takes place below Span B, it reflects on the strength of the trend towards downward. Ideally, if Span A trades above Span B, the trend is considered to be an uptrend. Likewise, if Span A trades below Span B, the trend is considered to be a downtrend. The behaviour of the cloud as either support or resistance depends upon the relative position of the price with respect to the cloud. For example, if the price of an asset is trading below cloud, the cloud acts as the resistance zone for the price. Likewise, if the price of an asset is trading above cloud, the cloud acts as the support zone for the price.
What is backward integration? Backward integration is a form of vertical integration which involves companies acquiring or creating processes enabling the company to produce its own inputs. These processes are those which the company had previously assigned to other companies up the supply chain. Complete vertical integration is achieved when a company is involved in all the stages of the production process. This can be achieved by the firm either by mergers and acquisitions with the companies in the supply chain, or by starting its own subsidiary to perform the tasks which had formerly been assigned to these companies. Copyright © 2021 Kalkine Media Pty Ltd Backward integration is a form of vertical integration used to make the business more competitive. What are some examples of vertical integration? Vertical integration can be better understood with an example. Consider an oil refining company like Marathon Petroleum Corporation that depends on another firm for providing it with crude oil. Marathon refinery purchases raw oil from other oil exploration companies and is only engaged in refining the oil and selling it. However, if Marathon were to acquire or merge with these oil exploration companies then it would be called a backward integration for Marathon. Consider a restaurant engaged in the production of wheat and potato-based products. The firm usually acquires these products through long-term contracts with farmers or wholesale grocery suppliers. If the firm now decided to start its own plantation growing wheat and potatoes, then it would be a backward integration. Here the firm has chosen to create its own production process without having to merge with or acquire any other company. This gives the firm endless possibilities to change how these inputs are processed. For instance, the firm can choose to opt for organic farming, which it could then advertise to its customers. How is backward integration different from forward integration? A company’s supply chain refers to the different stages involved in achieving the final good. The processes lying upwards in the chain are the initial stages while the processes lying further down are the final stages including the sale of the product or service. Backward integration involves integrating those production processes into the company’s operation that lie on the upper side of the supply chain. Whereas forward integration involves the integration of those processes into the firm’s operation that lie on the lower end of the supply chain. Forward integration involves companies acquiring or merging with those firms that are engaged in the distribution or in the retailing process of the product. For example, consider a cheese processing company that sells its product to a retailer for resale. If the company decides to set up its own retail chain, or its own digital platform to sell its cheese then it would be forward integration. What are the advantages of backward integration? Higher control: Integrating upper-level supply chain processes into a firm’s operation gives it higher level of control over how the final good turns out. This also allows companies to conduct their supply chain management more efficiently. Thus, there can be higher level of differentiation in the final goods as compared to other competitors. Additionally, the company would have a fixed supply of input when the subsidiary is engaged in raw material production. Competitive Advantage and Barriers to Entry: Acquiring a company through backward integration can allow access to exclusivity of the supplier. Other companies may no longer approach the supplier once the firm acquires or merges with it. This adds a competitive advantage to the firm and creates barriers to entry for other companies. Cost Cutting: When a raw material producer supplies it to companies lying lower on the supply chain, it would charge a mark-up over the actual cost of production to gain profits. However, if a firm were to become its own input supplier, then there would be no mark-up costs involved for it as it is producing for itself. What are the challenges with backward integration? Copyright © 2021 Kalkine Media Pty Ltd Lack of competitiveness: Removing competition by acquiring the supplier could sometimes have more adverse effects than benefits. Reduced competition could make a firm less competitive and hence less efficient. This could reduce the innovation in the firm and cause it to produce poorer quality products. Financial requirement: To acquire with a full-fledged supplier, firms must have adequate capital. Thus, backward integration can be a huge investment for firms. Many companies may consider debt financing which could end up hurting their balance sheet.
What are Capital Markets? Capital markets are the lifeline of an economy that facilitates funding for Government, corporations, and other institutions. Moreover, capital markets are funding infrastructure for the economy, therefore lifeline. Savings and investments are channelised to those in need of funding in capital markets. Investors and savers can include households and institutions, while capital seekers primarily include Governments, corporations, and institutions. Capital markets are the place where securities are exchanged between two parties. These securities incorporate equity, bonds, preferred shares, derivatives, commodities etc. Almost all financial instruments are traded in capital markets. Kalkine image Primary Market Vs Secondary Market Primary market is only concerned with the new issuance of securities. The moment security is exchanged between two parties after the initial issue, it happens in the secondary market. A company’s going public move is started through a primary market, where it directly sells securities to specific investors whereas once a company is public, it sells its securities (shares, bonds etc) to a large number of investors through the secondary market. Investment banks provide primary market services to capital seekers. A firm selling a bond goes to investment banks for underwriting, pricing, and listing of the security. Likewise, an initial public offering is also facilitated by investment banks for privately held enterprises looking for multiples. Market makers, brokers and dealers facilitate the secondary market for securities. Mostly these market participants are investment banks, but there are plenty of individual companies too providing secondary market services. Kalkine Image What are the types of capital markets? Stock market Also known as equity market, the stock market is the most popular capital market due to accessibility of investments. The liquidity levels in stock market are usually high, given the scale of market participants. Equity as an asset class has never faded for investors seeking capital appreciation. Stocks represent an ownership stake in the company, and stockholders have voting right on the decisions of the firm. A considerable portion of investors also includes households. Bond market Debt market provides large scale funding sources to an economy and is very crucial for economic development. Countries issue bonds in the debt market to fund their ambitions, while corporations and institutions have a similar intent. Bonds as an asset class is considered as safe because of regular interest payments on the principal amount as well as repayment of principal at the time of maturity. The risk of non-repayment of interest and principal is always present. Government bonds are considered as safest investments in the debt market, and yields on Government bonds depict the risk-free rate at a given point in time. Corporate debt is second to sovereign debt and is relatively riskier than the latter, therefore carries a higher interest rate. Commodity market Commodities are crucial for the global economy and have been factors of production in many industries. Unlike debt or equity, commodities have a movable presence and are traded extensively across global markets. As a resource, commodities have tangible demand and supply dynamic and are priced through these two market forces. While there are several types of publicly traded commodities, the popular ones include gold, silver, iron ore, coal, barley, grain, crude oil, platinum etc. Foreign exchange (FX) market The FX market is an essential part of capital markets, facilitating global trade and cross-currency flows across jurisdictions. Currencies and associated products are traded in the FX market. This market determines the exchange rate between the currencies of two countries. FX rate or exchange rate is evaluated based on the cross-comparison of various variables of two nations, including purchase power parity, the balance of payments, interest rates, inflation, GDP growth etc. Derivative market A derivative is a contract between two parties with an underlying asset, which would be exchanged on a specified future date at a pre-determined price. The value of a derivative contract changes consistently with the change in the value of the underlying asset. But the magnitude of change in the value of the derivative contract would be in multiples compared to change in the value of an underlying asset. The underlying asset to a derivative could be equity, bonds, commodity etc. Derivative also include structured products like total return swap, interest rate swap, swaptions, options, FX swaps etc. Private market A private market is a place where securities are exchanged privately between parties. Companies, before going public, trade in private markets. Private markets remain crucial for the development of new businesses and entrepreneurs. Businesses may experience significant capital activity in the private market. Private equity and venture capital are the prime examples of private market investors, seeking to invest in start-ups, ideas, and budding stories. Public market Public market is extremely transparent than the private market. In the public market, the investor base is large, and the information flow is extensive. All markets discussed above, except the private market, falls under the public market.