How to Understand the Oil Business

For the average Venezuelan, when he hears of the New York Stock Exchange, he thinks about the prices of a barrel of oil and vice versa. That is logical, in a country that obtains about 96% of its foreign exchange from oil.

The Venezuelan is a kind of rafter, who survives in the tumultuous sea of the economy, clutching a barrel of oil that is always half sunken as if it were a lifesaver.

Sometimes that barrel is more sunken than at other times but never ends to sink and much less to leave fully afloat.

Oil as a business Oil Business

The oil business is very particular. Although sales can be arranged in producing countries, the referential sales price comes from stock exchanges. That is where prices are set daily, minute by minute.

At any hour of the day or night, on some stock exchanges on the five continents, oil barrels are being negotiated. That makes prices fluctuate.

Prices that will depend on the quantities traded, history of past costs of recent operations and future prospects.

As with any other product, oil is a scarce commodity. Which implies that there are many buyers, but a few sellers. What makes it a market where sellers set more conditions for negotiations than what buyers may demand.

In the stock exchanges, it commands the law of supply and demand. That is, it is the place where buyers, who demand oil, and sellers who offer it, meet. Establishing a balance that determines the quantities that are traded, at a given price.

As the price of oil is determined by its quality, all crude grades are mathematically related to the prices of two markers, which are the world reference.

In the United States, that marker is the West Texas Intermediate, in Europe it is the Brent of the North Sea . They are so-called light crude for its high quality, which implies a greater purity.

Another benchmark indicator is the OPEC Referential Basket, which averages the value of crude oil from cartel member countries.

In any case, out of every three oil buying and selling businesses, in two the WTI is the marker used to set the price of the operation per barrel.

Usually, being of superior quality the WTI has a higher price than Brent. However, due to conditions in the European market and transport distance between production sites in the North Sea and competition with Arab and Russian oil, this price is sometimes higher or lower.

Apart from buying / selling stocks and bonds on the stock exchanges, so-called commodities are traded, which are not other things than raw materials.

The bet of the investorsoil-business

For investors, there are two types of raw materials: the hard and the soft. The first are usually minerals, such as oil, gold, iron, among others, and soft ones that are perishable agricultural products, such as sugar, flour, to name a few.

When commodities are traded, they are bought in one currency and can be valued at the exchange of the day of purchase in another currency. This in order to take advantage of the revaluation trend of a metal which is going to renegotiate that raw material in the future.

So you can buy oil in dollars, then resell it in pounds sterling or euros, depending on the price expectations and the risk that the investor wants to run.

In this way, the evaluation of a good is combined with that of a particular currency. It is a bet that investors make today, that they invest in a future in a raw material and in a currency, at the same time.

Just as investment houses are dedicated to the stock market, bonds and mutual funds, there are other companies that specialize in commodity marketing.

The investor buys quantities of oil, gold, among others, and the investment house keeps that purchase in their  deposits, until that customer wants to sell it.

In the case of oil, these inventories are held in deposits on the mainland, or on ships moored in international waters, pending better prices.

The Venezuelans

Oil Business

If the average Venezuelan lives in a country where the oil industry is not state owned and is not a monopoly, it would be aware of oil prices on the stock exchanges. He would know that if he wanted to participate in the business, he should buy shares on the downside, and sell them on the upside. That way I would make money.

Also, that Venezuelan could buy the bonds issued by the oil companies to finance their projects.

However, the link that Venezuelans have with the oil industry is very particular.

Conceptually, it is for all Venezuelans. Operationally, it is the government that manages and makes decisions without consulting theorist shareholders, who are citizens.

If oil rises, the Venezuelans’ mind  aspires and expects the government to share the benefits. If oil falls, Venezuelans can not say that we will invest in a different business.

When the time comes for lean cows, the Venezuelan sees the bones. When the time comes for fat cows, you should settle for the hides. While the lomito is lost in projects that probably do not interest and do not report any benefit.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s