General definition of Brent oil as a stock market asset:
First, let's take a few moments to give you a little more detail on Brent oil and its main features.
Brent petroleum originally got its name from an oil deposit which is located in the North Sea and more precisely, off Aberdeen in Scotland. The deposit was discovered in 1971 and gave its name to the reference oil that we know today. It was in 1976, 5 years after its discovery, that this deposit began to be exploited and the exploitation lasted over 35 years. Nowadays the deposit is no longer active since it has been drained. It was the Shell company which exploited the platform and deposit after its discovery, and gave it the name Brent in reference to the Brent goose which is a migratory bird frequently found in the Northern hemisphere. It's also an acronym using the first letters of the formation layers from which it's extracted: Broom, Rannoch, Etive, Ness and Talbert. It barely took a few years before the name Brent was finally used as the designation, by extension, of a type of light oil stemming from a mixture of different oils all extracted from the North Sea.
Nowadays, Brent crude oil is considered one of the largest types of oil in the world and is one of the top three black gold benchmarks for speculation on this commodity and on the financial markets. The other two reference oils are WTI or West Texas Intermediate which is an American oil and Dubai Crude/ Oman Crude.
As you've probably realized, Brent oil has become one of the biggest oil references around the world. This type of oil is classified as light oil because of its very low density and is also considered to be sweet crude oil because of its low sulphur content. The fact that it is directly and exclusively extracted from the North Sea gives it other names like North Sea Brent or London Brent. It's also possible to name a barrel of oil "Blue Barrel" because of the colour of black gold.
It is also important to know that a barrel of oil has a capacity of around 42 US gallons, which represents approximately 159 litters. The sulphur content of Brent oil is 0.37% on average with an API density of around 38.06 as well as a specific density of around 0.835.
It's possible to produce both petrol and distillates when using Brent oil. It's also worth noting that the vast majority of its refining is still carried out in Western Europe today.
Originally, it was in London's financial centre and only at the auction on the international oil exchange that it was possible to trade Brent oil. But since 2005, things have changed a lot and Brent oil is tradable on the Intercontinental Exchange or ICE electronic platform. The size of a contract is 1,000 barrels of Brent oil on this platform, which represents 42,000 gallons.
The major differences between Brent oil and WTI oil:
As we saw above, Brent Crude is one of the most popular types of oil in the world along with Dubai Crude and WTI. West Texas Intermediate is certainly another benchmark oil, however there are certain differences with Brent that you should know about.
We know that Brent oil is used as a benchmark for only part of the world oil market. This is mainly the European market in which it is produced, but also other markets. So it's not the only reference for this raw material in the world. Among its direct “competitors”, there is WTI which is the benchmark oil for the American market.
There are also notable differences between these two types of oils, from a physical point of view as well. One of the biggest differences between Brent and WTI is the degree of API which itself determines the density as well as the quality of this oil. WTI has a slightly higher API than that of Brent oil. It contains on average 0.24% sulphur and is therefore considered to be a better quality crude oil. Brent oil, on the other hand, contains an average of 0.37% sulphur.
So, what makes the price difference between these two types of oil? It's naturally a question of oil quality as seen above, but not only. The price of one and the other can also vary depending on the production and delivery costs of the barrels. Other external factors, such as the geopolitical tensions taking place in the Middle East, can significantly reduce the production and therefore the supply of oil and therefore contribute to raising prices. However, the WTI is often less exposed to this type of risk so is a little less impacted by the consequences of this type of tension as it's located in isolated areas of the United States.
Apart from these few differences and strictly from a stock market point of view, the prices of Brent oil and WTI oil are often positively correlated. This means that they most often move in the same direction.
Where and how is the price of a barrel of Brent oil quoted?
Of course before analysing effectively in the price of a barrel of Brent oil, it is necessary to know where this raw material is quoted, in what way and by whom. That's what you'll find here.
Trading in physical oil, which is traded in barrels, is done directly on what is called the spot market. On this market, there are various players in the oil market such as oil companies and refiners, who will exchange crude oil between themselves. On the spot market, the price of Brent crude is continuously listed, which means that its price changes 24 hours a day. There are different financial centres on which crude benchmark oils are listed around the world.
The ICE or Intercontinental Exchange in London is responsible for the quoting of Brent Crude. It's important to differentiate the ICE market from the spot oil market. On the London stock exchange, oil is not exchanged in its physical form, meaning in barrels, but only on buy limit order. As a result, it's mainly the positions taken by traders that influence the price of Brent oil and its development in real time. In order to determine this price, operators based themselves on the positions taken for the buy and the positions taken on the sale.
How to anticipate future variations in Brent oil:
If you want to invest in Brent oil and anticipate future price changes, you need to know the elements that influence supply and demand. This could include:
- OPEC decisions concerning oil production in certain countries.
- The discovery of new deposits.
- Conflicts affecting oil producing countries.
- The health of the global industry that consumes most of the oil produced.
- The evolution and market share of alternative energies.
You'll also need to systematically use technical analysis which is important here due to the very high volatility of this asset. The historical stock market charts will provide you with the basics for taking position in addition to this fundamental analysis.
Where and how to invest in Brent oil prices:
If you're looking into Brent oil and the variations in its price, bear in mind that there are several ways to invest your money into this raw material. Here are the main ones:
- Futures contracts: First of all, you can use futures markets to trade Brent oil. These contracts are in fact an investment on a quantity of 1,000 barrels of Brent oil and represent an approximate amount of $ 10,000 each. Keep in mind that each of these contracts will vary by 10 dollars per tick, meaning a variation in price of the market by 1000 dollars for a variation of 1 dollar of the barrel price. As explained above, these contracts are traded on the ICE or Intercontinental Exchange platform and each of them has its own expiration date. Once this expiration date is reached, contracts are rolled over to the next deadline or can be closed. In any case, these contracts do not allow physical delivery of oil, unlike Forward contracts.
- CFDs: Also called "contract for difference", CFDs are made available online by brokers and allow you to invest in Brent oil with no margin constraint required as is the case with futures. You can therefore invest the amount of your choice without the obligation to buy or sell a batch of 1000 barrels. You don't invest directly on the oil market here but through a broker who benefits through "spreads" earnings fees.
- ETFs: Another type of contract for trading Brent oil are ETFs, which are funds that replicate relatively accurately the development of oil prices but have higher or lower management fees.
- Oil market stocks: Finally, you can choose to invest indirectly in the price of Brent oil by buying or trading stocks of listed companies whose main activity is the extraction or production of Brent oil. The price of these stocks generally follows that of Brent oil as a commodity. However, it's also important to know other elements that can influence these shares such as the financial health of the company that issues them.
Ultimately, it's up to you to choose the way you invest in Brent oil, one that best matches your expectations and profile.