Crude Oil -Part 2

12.1 Mapping the Crude Oil Ecosystem

Varun: Isha, I get that crude oil is a big deal globally, but I’ve never really understood how it moves from underground to our fuel tanks.

Isha: That’s the physical side of the oil ecosystem, Varun. It starts with extraction—either on land or offshore—using rigs and heavy infrastructure.

Varun: And Indian companies are involved in this?

Isha: Absolutely. Firms like Aban Offshore and Cairn Oil & Gas play key roles. But before investing in them, it’s important to understand how their business works and what affects their profits.

Varun: So it’s not just about oil prices?

Isha: Exactly. Operational costs, debt, and global risks matter too. Let’s explore how this ecosystem is structured.

In the previous module, we explored the fundamentals behind crude oil pricing and global market dynamics. Now, let’s shift focus to the physical side of the oil industry—how crude oil is extracted, processed, and the companies involved in this massive supply chain.

From Ground to Refinery: The Journey of Crude Oil

Crude oil is extracted from both land-based fields and offshore reserves. The process involves drilling deep into the earth or ocean beds using specialized infrastructure known as oil rigs. These rigs are large, floating platforms often seen offshore, equipped with drilling towers and exhaust flares.

If you’re curious about how this works, there are excellent animated explainers available online that visually walk through the extraction process. These videos offer a high-level overview of how oil travels from beneath the surface to refineries and eventually to consumers.

Key Players in Infrastructure Development

Several Indian companies are directly involved in building and operating this infrastructure. Examples include:

• Aban Offshore– Specializes in offshore drilling services
• Selan Exploration– Focuses on onshore oil and gas exploration
• Cairn Oil & Gas (Vedanta Group)– Operates some of India’s largest oil fields

These firms are asset-heavy, meaning they invest heavily in physical infrastructure like rigs, pipelines, and storage facilities. While they offer exposure to the energy sector, their performance is closely tied to operational efficiency, global oil prices, and regulatory frameworks.

Why Understanding the Business Model Matters

Many traders and investors jump into oil-related stocks without fully grasping how these companies operate. This can be risky. For example, a company might show strong revenue growth but face high maintenance costs or geopolitical risks that impact profitability.

Before investing in such firms, it’s important to understand:

• Their role in the oil supply chain (exploration, drilling, refining, distribution)
• Their exposure to global price fluctuations
• Their debt levels and capital expenditure commitments

In short, knowing the operational core of oil companies helps you make informed decisions and avoid surprises.

12.2 –Upstream, Downstream, and Midstream

Upstream: The Extraction Core of the Oil Industry

The upstream segment of the oil and gas industry is where everything begins. It involves the exploration and extraction of crude oil and natural gas from beneath the earth’s surface or ocean beds. Companies operating in this space conduct geological surveys, drill exploratory wells, and invest heavily in infrastructure to access and extract hydrocarbons. These operations are capital-intensive and often span several years before becoming commercially viable. Once oil is discovered, it is extracted and stored in barrels, ready to be sold in the global market.

However, upstream companies do not control the price at which they sell their oil. Prices are determined by global benchmarks such as Brent or WTI, which are influenced by international supply-demand dynamics, geopolitical developments, and macroeconomic trends. Each upstream company has a breakeven point—known as the full-cycle cost—which represents the minimum price per barrel required to cover its production expenses. If market prices fall below this level, the company may operate at a loss. Indian companies like ONGC, Oil India, and Cairn Oil & Gas are key players in this segment, while global giants include Shell, BP, and Chevron. These companies typically benefit from higher oil prices, which improve their profit margins without increasing extraction costs. Conversely, when prices fall, their profitability is significantly impacted, especially if their breakeven costs are high.

Midstream: The Logistics Backbone

Midstream companies form the critical link between the extraction and refining stages of the oil value chain. Their primary role is to transport crude oil and natural gas from production sites to refineries and storage facilities. This is achieved through an extensive network of pipelines, rail systems, tankers, and storage terminals. Some midstream firms also engage in limited processing activities, which can blur the line between midstream and downstream operations.

Unlike upstream and downstream companies, midstream firms are generally less exposed to fluctuations in oil prices. Their revenues often come from long-term contracts that guarantee fixed returns based on the volume of oil transported rather than its market price. However, they are still vulnerable to disruptions in supply and demand. If upstream production slows down or downstream demand weakens, the volume of oil flowing through their infrastructure declines, affecting their earnings. Stability in oil prices is ideal for midstream companies, as it ensures consistent throughput and minimizes operational risk. Globally, companies like TC Energy, Kinder Morgan, and Enbridge are prominent players in this segment.

Downstream: Refining and Retailing Petroleum Products

The downstream segment is where crude oil is transformed into usable products and delivered to end consumers. This includes refining crude oil into petrol, diesel, jet fuel, LPG, lubricants, and other petrochemicals. Downstream companies also manage the distribution of these products through wholesale and retail networks, including petrol pumps and fuel stations.

These companies purchase crude oil from upstream producers and process it into finished goods. When crude oil prices fall, downstream firms benefit from lower input costs, which can improve their refining margins—especially if retail prices remain stable or are regulated. However, their profitability also depends on refining efficiency, demand patterns, and government policies. In India, companies like Indian Oil Corporation, Bharat Petroleum, and Hindustan Petroleum dominate the downstream space. Internationally, ExxonMobil is a notable example of a fully integrated company that operates across all three segments of the oil value chain.

Downstream companies are often seen as beneficiaries of falling oil prices, as they can maintain or even increase their margins. However, in markets with strict price controls, the benefit may not always be passed on to consumers, and companies may face margin pressure if input costs rise sharply.

Interdependence and Strategic Implications

The upstream, midstream, and downstream segments are deeply interconnected, and their performance is influenced by the same underlying commodity—crude oil—but in different ways. Upstream and downstream companies often have an inverse relationship. When oil prices rise, upstream companies benefit from higher selling prices, while downstream companies face increased input costs that can compress their margins. On the other hand, when oil prices fall, upstream firms may struggle to remain profitable, while downstream companies enjoy lower costs and potentially higher margins.

Midstream companies, positioned between the two, prefer price stability. Their business model relies on consistent volumes and long-term contracts, making them less sensitive to price swings but still vulnerable to disruptions in the supply chain. For investors and traders, understanding where a company fits in this value chain is crucial. A price movement in crude oil may not directly impact the commodity itself but could create opportunities in related sectors. For example, a sharp drop in oil prices might hurt ONGC, an upstream company, but benefit BPCL, a downstream refiner and distributor.

12.3 WTI vs Brent Crude: Understanding the Global Benchmarks

Varun: Isha, I keep seeing WTI and Brent mentioned in oil news. Are they different types of crude?

Isha: Yes, they’re global benchmarks. WTI comes from the U.S., Brent from the North Sea. Both are high-quality, but Brent is more widely used.

Varun: Why does Brent usually trade at a higher price?

Isha: Because it’s easier to transport and reflects broader global risks. For Indian traders, Brent matters more since MCX contracts are linked to it.

Varun: Got it. So knowing the benchmark helps me track price trends better.

Isha: Exactly. Let’s compare their properties and market relevance.

Crude oil is often spoken about as if it’s a single, uniform commodity—like gold or silver. But in reality, crude oil exists in many different forms, each with distinct characteristics shaped by geography, geology, and chemical composition. These variations affect everything from the oil’s colour and thickness to its sulphur content and refining potential.

The differences are so pronounced that crude oil extracted from one region can behave very differently from oil sourced elsewhere. Some varieties are light and golden, while others are thick and black. Their viscosity, volatility, and sulphur levels vary significantly, influencing how easily they can be refined and what types of fuels they produce.

Among the many types of crude oil traded globally, two benchmarks dominate international pricing and trading: West Texas Intermediate (WTI) and Brent Blend. These are the most widely tracked and traded varieties, and understanding their differences is essential for anyone involved in commodity markets.

Key Characteristics: API Gravity and Sweetness

Two metrics help classify crude oil and determine its market value:

API Gravity is a measure developed by the American Petroleum Institute to assess how light or heavy a crude oil is compared to water. If the API gravity is above 10, the oil is lighter than water and floats. The higher the API gravity, the lighter the oil—making it more desirable for producing fuels like petrol and aviation fuel.

Sweetness refers to the sulphur content in crude oil. Oils with less than 0.5% sulphur are considered “sweet,” which means they are easier and cheaper to refine. Higher sulphur content makes the oil “sour,” requiring more complex processing and resulting in higher refining costs.

West Texas Intermediate (WTI)

WTI is a high-grade crude oil sourced primarily from fields in Texas and surrounding regions in the United States. It is known for its superior refining characteristics, with an API gravity of 39.6, making it extremely light. Its sulphur content is just 0.26%, classifying it as a very sweet crude. These properties make WTI ideal for producing high-value refined products like gasoline and jet fuel.

As of October 2025, WTI is trading around $58.65 per barrel, reflecting recent market pressures including oversupply and subdued demand.

Brent Blend

Brent crude originates from the North Sea and is a blend of oil from multiple fields, including Brent, Forties, Oseberg, and Ekofisk. Its API gravity is approximately 38.06, making it slightly heavier than WTI but still classified as light. The sulphur content is around 0.37%, which makes it sweet, though not as sweet as WTI.

Brent is the global benchmark for crude oil pricing and is used to price nearly two-thirds of the world’s internationally traded oil. As of October 2025, Brent crude is trading at approximately $62.24 per barrel, maintaining a premium over WTI due to its broader market relevance and logistical advantages.

Why the Price Difference?

Despite both being high-quality light sweet crudes, Brent typically trades at a premium to WTI. This is due to several factors:

• Geopolitical exposure: Brent reflects broader global supply risks, especially from the Middle East and Africa.
• Logistics: Brent is waterborne and easier to transport globally, while WTI is landlocked and more U.S.-centric.
• Market access: Brent has wider adoption in international contracts and is more representative of global demand.

Relevance to Indian Traders

For Indian market participants, it’s important to note that crude oil contracts on MCX are benchmarked to Brent, not WTI. This means that price movements in Brent directly influence domestic futures pricing and trading strategies. Understanding the distinction between these two benchmarks helps traders interpret global news, forecast price trends, and assess the impact on Indian oil-linked companies.

12.5 The relationship between US Dollar and Crude Oil

What the Chart Shows

• Purple Line: Represents the Trade Weighted U.S. Dollar Index (Broad). This tracks the strength of the U.S. dollar against a basket of global currencies.
• Red Line: Represents WTI Crude Oil Prices(West Texas Intermediate), a key benchmark for U.S. oil.

Each line is plotted against its own vertical axis:

• The left axis(for the dollar index) ranges from 80 to 140.
• The right axis(for oil prices) ranges from $20 to $120 per barrel.

Key Observations

1. Inverse Relationship:

When the S. dollar strengthens(purple line rises), crude oil prices tend to fall (red line drops).

When the dollar weakens, oil prices often rise.

This pattern is visible in several periods, especially:

• 2014–2016: Dollar surged, oil collapsed from ~$100 to ~$27.
• 2021–2022: Dollar dipped, oil peaked near $100.
• 2023–2025: Dollar rose again, oil declined to ~$60.

2. Economic Implications:

• A strong dollar makes oil more expensive for non-dollar economies, reducing demand.
• A weak dollar boosts global purchasing power, increasing oil demand and prices.

      3.  Trading Relevance:

• This relationship is crucial for traders in MCX crude oil contracts and currency derivatives.
• For Indian investors, a rising dollar can mean cheaper oil imports in rupee terms—but also pressure on emerging market currencies.

12.6 Key Takeaways

• Crude oil moves through a complex supply chain, from extraction to refining and retailing.
• Indian companies like Cairn and ONGC operate in upstream, while BPCL and IOC dominate downstream.
• The oil industry is divided into upstream, midstream, and downstream segments, each reacting differently to price changes.
• Upstream firms benefit from high oil prices, while downstream firms gain when prices fall.
• Midstream companies rely on stable volumes, earning through transport contracts rather than price swings.
• WTI and Brent are global benchmarks, with Brent being more relevant for Indian traders.
• Brent trades at a premium due to broader market exposure and easier logistics.
• Crude oil and the U.S. dollar have an inverse relationship, impacting global demand and pricing.
• A strong dollar makes oil expensive for non-dollar economies, reducing demand and pressuring prices.
• Charts tracking the dollar and oil prices confirm this pattern, helping traders build smarter strategies.

12.7 Fun Activity: “Crude Contract Calculator”

You are a trader analyzing the MCX Crude Oil Futures contract. Use the data below to answer the questions.

Scenario:

• Lot Size: 100 barrels
• Tick Size: ₹1
• Current Price: ₹5,865 per barrel
• NRML Margin: 9%
• MIS Margin: 4.5%

Questions:

1. What is the contract value for one lot?
2. What is the NRML margin required to hold the position overnight?
3. What is the MIS margin for intraday trading?
4. If the price moves up by ₹10, what is your profit per lot?
5. If the price drops by ₹7, what is your loss per lot?

 Answers:

1. Contract Value= 100 × ₹5,865 = ₹5,86,500
2. NRML Margin= 9% × ₹5,86,500 = ₹52,785
3. MIS Margin= 4.5% × ₹5,86,500 = ₹26,392.50
4. Profit= ₹10 × 100 = ₹1,000
5. Loss= ₹7 × 100 = ₹700