Glossary of Terms in the Oil Market

Money and precious metals have always been favorite instruments to invest in, but in recent times, investors are looking at different sectors like the oil market, which is booming. New investors in this field is often confused with the various terminology used by trading experts, brokers and investors on trading forums. There is no need to worry; Your Personal Financial Mentor is here to simplify the glossary used in the oil market.

Let us start with the units of measurement. 1 gallon of crude oil converts to 0.57 gallons of refined oil on an average. A standard ‘barrel of oil’ contains 42 gallons or 159 liters and is commonly referred to by the abbreviation BBL. The daily consumption of oil is measured in BBL/d which is ‘barrels per day’. Another related term is BOE, which stands for Barrel of Oil Equivalent; this is the unit of energy obtained when 1 BBL is burnt. This term BOE often appears in financial statements of companies in the oil market, reflecting a common measure for their reserves and production.

Just as precious metals are mined, oil is drilled from the earth. This process is carried out on rigs, which can be situated on land, but more commonly as an offshore rig in the middle of the deep sea. The better rigs use high technology tools to extract more crude oil. From these rigs, oil is transported in two ways – cheaper tankers for international coverage and more expensive pipelines for intra-continental transportation.

Commodity exchange traded funds is a good way for investors to make money from the oil market without actually owning the oil. The oil ETF consists of oil stocks, oil futures or derivatives. The decision of which companies to invest in and in what proportion is left up to the ETF management; hence they are more attractive to new investors who do not have much expertise on the oil market. A variation of ETF is ETN, or Exchange Traded Note. These are debt notes issued by the government or major bank which are similar to bonds. ETNs have a lower profit potential than EFTs, but they offer lower risk to investors.

The oil index is the collection of companies that are involved in the oil market in different phases. This index has a price which fluctuates based on the stock prices of its component companies, which in turn depend on their performance.

Categories: Oil Commodity Market

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August 17, 2013 Glossary of Terms in the Oil Market