This research paper seeks to unearth the possible repercussions of fluctuations in Crude Oil markets and how they will affect global trade and financial markets. Crude oil or Black Gold is one of the world’s most precious commodities as its change in price affects the entire economy.

1. Understanding Oil Markets and the Implications for Financial Markets 1
1
An Investigation of Crude Oil and its Implication for Financial Markets
Priesnell Warren
August 30, 2017

2. Understanding Oil Markets and the Implications for Financial Markets 2
2
ABSTRACT.
This research paper seeks to unearth the possible repercussions of fluctuations in Crude Oil
markets and how they will affect global trade and financial markets. Crude oil or Black Gold is
one of the world’s most precious commodities as its change in price affects the entire economy.
The paper takes a look at the pre and post recession of 2009. Understanding the dynamics of
Crude oil fluctuations is non-linear and as a result one must take along a historical perspective,
matched with present day data in the quest to better understand the consequences of market
fundamentals and random events. Oil prices took a negative turn in 2008 following the global
economic downturn rose to highs of $104 per barrel in ensuing years only to plummet and
stabilize at figures of less than $60.00 per barrel on average.
The financial market itself clearly is not a stand alone as oil is heavily traded on commodity
exchanges globally with stocks and ETF alike. This in itself affects the circulation of the
exchange rate for non-oil producing Small Island Developing States (SIDS) within the Caribbean
including Jamaica. The author has made a recommendation to hold oil market assets.
OBJECTIVE
This essay seeks analyze the International Oil Markets and provide an outlook/expectation of oil
prices over the short to medium term.
This paper will also examine the possible impact of the expected change in the price of oil in the
international market as well as local financial markets and provide policy recommendations that
financial institutions can pursue in order to position themselves to take advantage of or protect
themselves against fluctuations in oil prices.

3. Understanding Oil Markets and the Implications for Financial Markets 3
3
TABLE OF CONTENTS
Abstract.............................................................................................................................. 2
Objective............................................................................................................................ 2
Table of Contents............................................................................................................... 3
Introduction........................................................................................................................ 3
Research Questions............................................................................................................ 4
Global Oil Outlook ............................................................................................................ 4
Findings and analysis......................................................................................................... 9
Recommendations............................................................................................................ 15
Conclusion....................................................................................................................... 15
Reference ......................................................................................................................... 16
INTRODUCTION
Crude Oil (or oil) historical has been one of the most difficult economic variables to predict due
to its high level of volatility to due political and other geopolitical tensions and treaties over the
past several decades. The West Texas Instrument (WTI) was once the main global benchmark
used to price Crude Oil, it had once major flaw. A ban on exports in the 1960’s meant that it had
the possible effect of becoming detached from the rest of the world. Although Brent, is more
commonly used across the globe-been the current international benchmark it has fewer, larger
transactions, generating prices can be tedious and is connected to quickly declining oil provinces.
As a result the WTI is used for the purpose of this research, making its relevance closure to
home. Notwithstanding that the USA is Jamaica’s largest trading partner.
The article quickly visits the background of the industry with an understanding of the most used
international benchmarks used to measure the best grades of Crude oil. In comparison to years
prior to the Global recession, market dynamics/structure were vastly different with the balance of
power moving from East to West with US and Canada hiking their production.

4. Understanding Oil Markets and the Implications for Financial Markets 4
4
RESEARCH QUESTIONS
1. What is the current price of Crude Oil?
1.1 How is Oil categorized and measured?
2. Describe the Structure of the International Oil markets.
2.1 What is the current level of demand and supply for Crude Oil?
3. What are the significant Factors affecting the Price of Crude Oil?
3.1 How are they expected to affect the Price of Oil in the Short to Medium term?
3.2 Subsequently, how will this impact Caricom?
4. Is there a direct Relationship between Oil and Financial Markets?
4.1 If yes, kindly describe this relationship and how it will impact Financial Markets.
4.2 What can measures can Financial Institutions put in place to benefit from or protect
against loss from the fluctuation of Oil Prices?
GLOBAL OIL OUTLOOK
Global Benchmarks
Crude Oil prices on the West Texas Intermediate (WTI/NYMEX) dates back to 1946 according
to Macrotrends. Prices are adjusted for inflation and delivered in real-time, currently pricing
Crude Oil at 49.71 per barrel (Bloomberg, 2017). Oil, gas and other bi-products may be
measured by volume, weight or thermal energy depending on the purpose of its use and or
national preference. Making the most widely used standard 42-gallon barrel (bbl) that dates back
to the 1860’s (IHRDC, 2017).
According to the Economist, the USA is today still recouping from the 1973 oil crisis that
resulted in a ban of most exports of Crude Oil. Though hundreds of grades of Crude Oil are sold,
traders use only a handful of benchmarks such as Brent from the North Sea, the current

5. Understanding Oil Markets and the Implications for Financial Markets 5
5
international standard. However Americans prefer to use the WTI which is similar grade to that
of Brent and its prices can be observed directly.
The Structure of Oil Markets
Although several factors have contributed to higher crude oil prices, a combination of strong
global demand since 2003 and the unpredictability of supply has been the major cause (IMF,
2005). This major shift in demand spurred by rapid growth of China and emerging economies
such as India, Japan and Korea had caused a level of tightness. Factors of Geopolitical risks and
fears of disruptions in supply as well as price speculation has played there part. In terms of
supply, figures from 2005 showed that OPEC provided 40% of the world market and held
approximately 70% of global oil reserves; just over a decade later and things has changed.
OPEC’s 14 member base primarily acts as a semi-cartel in normal times by aiming to maintain
excess extraction capacity in order to influence prices (IMF, 2005). In contrast, non-OPEC
producers have generally behaved as price takers.
The world owes its development to oil. Importantly, crude oil has been refined to make fuels;
petrol and diesel, lubricants and industrial chemicals since the 1850’s. The 2 largest companies
in 2014 were oil and gas producers; in fact 6 of the largest corporations by revenue were oil and
gas producers. However, while Crude Oil is an important form of energy it is a non-renewable
resource with limited alternatives.

6. Understanding Oil Markets and the Implications for Financial Markets 6
6
Global Supply
According to US Energy Information Administration global petrol and other fuels grow by 0.3
million barrels per day last year. This occurrence was the 3rd year in a row but expected a closer
balance to be found during the next several months.

7. Understanding Oil Markets and the Implications for Financial Markets 7
7
ASIA Pacific Oil Markets
Global consumption of petroleum and other fuels averaged 86.9 million barrels per day in 2016
and are expected to grow by 1.5 and 1.06 million barrels per day in 2017 and 2018 respectively.
Outside the Organization of Economic Co-operation and Development (OECD) that accounts for
34 mostly developed nations China and India are expected to be the largest contributors to fuel
demand. China is expected to consume 0.3 million more barrels per day for 2017 and 2018. This
results increased demand for gasoline, jet fuel and hydrogen gas liquids (HGL). On the other
hand, its diesel consumption plummeted in 2016 due to a slowdown in industrial activity; which
is expected to be relatively unchanged.
India’s fuel demand is expected to grow by .02 and 0.3 million barrels per day 2017 and 2018
respectively. Mostly fuelled by the use of transportation fuels, as the government’s
demonetization programme in 2016 caused chaos leading to a fall in overall consumption. But by
quarter 1 and 2, 2017 consumption began growing at previously seen levels (EIA, 2016).
Demand side
Non-OECD countries excluding China and India liquid fuels are forecasted to grow by
approximately 0.6 million barrels per day. This is as parts of the Middle East and African states
are expected to account for most of this growth. The OECD block saw an 0.4 million barrel per
day growth in 2016, even as consumption growth in Europe slowed (EIA, 2016). For 2017
demand is forecasted to be around 0.03 million barrels per day considering slight growth in
Europe and a slight decline in Japan. Ultimately, 2018 has prospects of growth in the arena of 0.4
barrels per day with the United States accounting for a lion share of the increase in both years.

8. Understanding Oil Markets and the Implications for Financial Markets 8
8
Commodities Exchange
Oil suppliers and buyers meet on commodity exchanges such as the New York Mercantile
Exchange (NYMEX) in New York City and the Intercontinental Exchange (ICE) in London and
Atlanta. Settlements on these exchanges may take the form of options, futures and the actual
delivery of crude oil and other related products. (Happonen, 2009, pg 22& 23).
There are many reasons why currencies traded and commodities such as oil are not independent
of each other. Crude Oil prices in and around the world rose consistently between 2002 and
2008. However at the cost of the recession prices fell as a direct result of global slowdown.

9. Understanding Oil Markets and the Implications for Financial Markets 9
9
Observing the production and market power of oil producers is not nearly enough in
understanding the price of oil. Before final products such as lubricants, fuel industrial and
transportation oil passes through the marketplace. Usually each player has differing interests,
assumptions and information trade with it and its derivatives.
FINDINGS AND ANALYSIS
Crude oil prices are incredibly sensitive to shocks, changing quickly in response to news
briefings, changes in economic or political policies. Price spikes or falls can send global
exchanges into a tailspin (Bjpai, 2015). While there are several factors impacting the price of
Crude oil the delicate balance between supply and demand is a major factor.

10. Understanding Oil Markets and the Implications for Financial Markets
10
10
Market Fundamentals
For decades OPEC has managed to dictate market terms with their supplier power covering
upwards of 80% of the worlds output at their peak. However by the end of 2014 the largest
consumer and importer of oil-United States was producing 9 million barrels of oil per day, an
increase of 80% post recession (Cunningham, 2015 pg3). Moreover, OPEC producers such as
Iran and Venezuela have been having their share of difficulties. Price elasticity of demand (PED)
suggests that lowering prices will in turn drive up demand ultimately changing the forecast. Not
entirely, in countries such as Jamaica where the oil refinery is controlled by the state, low prices
may not trickle down or as quickly to the retail level. But the US has seen the consumption of
petrol sky rocketed to post global recession levels.
Courtesy of Investopedia
Most recently crude oil prices have been down, while demand has not slowed suggesting that
there is a gradual tightening of the market which will show a gradual rise in the price of Crude

11. Understanding Oil Markets and the Implications for Financial Markets
11
11
oil and other related products. Despite the bearish trends, there are signs that demand is picking
up while inventory has falling week ending July 14, 2014 according (EIA, 2017).
Exchange Traded Funds
Although, bouncing back from lows in June Crude oil prices has negatively impacted investors
who have bought long via the US Oil (USO) Exchange Traded Funds (ETF). Others include the
Vanguard Energy ETF (VDE) and energy stocks such as Exxon Mobil Corporation (XOM) and
Devon Energy Corporation.

12. Understanding Oil Markets and the Implications for Financial Markets
12
12
Geopolitical Risks
As mentioned, Crude oil remains highly susceptible to external shocks none such more than
issues related to international borders and passageways. Early 2014, civil war in Libya blocked
oil exports, contributing to a rise in prices. In Iraq, ISIS overran parts of the country and took
control of oil fields leading to concerns of oil shortages. On the contrary, Geopolitical flashpoints
have had a relatively limited effects on the changes I oil prices. Notwithstanding, Geopolitical
crises are some of the most powerful short-term movers of oil prices (Cunningham, 2015 p6).
An area of concern is evident as President Trump recently threatened to impose sanction against
Venezuela if the government continues its plans for a constituent assembly election today
(Crawford, 2017). The Market could be in for shocks if this affects imports to the Arabian Gulf.
Consider the current Political turmoil that has been negatively impacting Venezuela…

13. Understanding Oil Markets and the Implications for Financial Markets
13
13
Caricom recently met in Grenada but was not holding to any commitments towards Venezuela
despite its political and economic crisis, considering the PetroCaribe Oil deal. It remains to be
seen how adverse results from failure to stem the crisis will affect the Caribbean and Jamaica in
particular.
Courtesy of IEA
Market Speculation
Besides market fundamentals, speculation accounts for a major portion of the trading of Crude
oil and its related products. It may arise as a result of changes in either supply or demand,
leading to begs for and against mark conditions. Invariably prices may go down because of an
increase in production but the reverse could be true depending on other factors such as the price
elasticity of demand in strong markets and or major political turmoil such as those mentioned
before.

14. Understanding Oil Markets and the Implications for Financial Markets
14
14
Oil prices are expected to remain relatively constant in the short term due to increase US
production along with a struggling OPEC.
However, empirical evidence has shown that asset prices can contain bubbles where price does
not correspond to its fundamental value based on supply and demand. Recent changes I the price
of oil has been blamed on speculators who trade futures. The price was said to be artificially
driven up without the justification of fundamental factors. The market for oil derivatives has
grown significantly in recent years. Unlike equities Crude oil s consumed on the spot, once
physically sold on the spot market it rarely returns to be resold. Making the exchange in oil
constrained by arbitrage conditions in storage and futures markets which are both required to be
in equilibrium for arbitrage to be unprofitable (Happonen, 2009, pg46).
Supply-side graph, EIA

15. Understanding Oil Markets and the Implications for Financial Markets
15
15
RECOMMENDATIONS
Crude oil prices are expected to grow steadily as such a recommendation is been made to Hold.
Financial institutions may take the following policy measures:
At this point Crude oil and its related products are not expected to fall although not
growing rapidly; as such holdings directly in the Commodity, Oil stocks and ETFs are
expected to be relatively safe and can be fairly valued providing a better return than fixed
income instruments.
The Securities Exchange Commission requires financial intuitions to have limits on the
carrying value of their oil and gas properties. As result, these institutions must consider
the short to medium term and maximize on this limit as the market is set to grow
gradually which makes its price more predictable.
Locally the Bank of Jamaica has in effect a 10% limit exposure to hard currency
instruments. As such, they may choose to restructure their portfolio to include these
stocks and ETFs.
Internationally financial institutions should continue to extend credit to energy companies
that may be face with the need to bolster working capital. Longer term loans should be
considered separately.
One can safely say that hedging against business related risks by purchasing forward
contracts can be reduced gradually as market volatility is lower.
CONCLUSION
Oil markets have rapidly changed during the last decades from the major influence of a few price
makers through the rapid growth of non-OPEC and OECD member countries specifically China
and India as well as the gap filled by the financial markets. The price of oil is not expected to
change rapidly in the short run although it remains susceptible to various Geopolitical risks.

16. Understanding Oil Markets and the Implications for Financial Markets
16
16
In light of the changes in market dynamics it remains too early to say if Crude oil will reap big
bucks for suppliers and the financial markets. As higher prices would be ideal for these players
but no one knows for sure the equilibrium price so as to prevent a price bubble.
Notwithstanding, the capping of supplies within OPEC states, production and inventories are
going to offset this move. The current boost is provided by the production of shale in the United
States where net exports continues to be quiet positive. Additionally, consumption demand has
been growing at faster rates thus a cut in production make lead to the repletion of OPEC oil
inventories.
Ultimately, the price of Crude oil is expected to be around $55 to $60 bbl in the medium term as
consumption demand will grow steadily.
Oil prices will remain low despite OPEC trying to cut production. It finds it difficulty primarily
because of economic pressures faced by several of its members.
REFERENCE
Azizov, M. I. (2011). OIL MARKET STRUCTURE AND PRICING. International Conference
on Economics, Business and Management.
Bloomberg. (2017, July 28). Retrieved from https://www.bloomberg.com:
https://www.bloomberg.com/quote/CL1:COM
Economist. (2017, July 29). Oil benchmarks: Crude Measure. Retrieved from
https://www.economist.com: https://www.economist.com/news/finance-and-
economics/21685485-american-oil-exports-have-boosted-wti-benchmark-now-crude-
measure

17. Understanding Oil Markets and the Implications for Financial Markets
17
17
EIA. (2017, July 28). Short-Term Energy Outlook. Retrieved from ww.eia.gov:
https://www.eia.gov/outlooks/steo/report/global_oil.cfm
Happonen, J. (2009). A Review of Factors Determining Crude Oil Prices. Helsinki: Helsinki
School of Economics.
IHRDC. (n.d.). Oil & Gas Industry Overview: Measurement Units and Conversion Factors.
Retrieved from https://www.ihrdc.com/: https://www.ihrdc.com/els/po-
demo/module01/mod_001_03.htm
IMF. (2005, September 21). IMF. Retrieved from https://www.imf.org:
https://www.imf.org/external/np/pp/eng/2005/092105o.htm
Investopedia. (2015, August 13). Top Factors & reports That Affect The Price of Oil. Retrieved
from http://www.investopedia.com:
http://www.investopedia.com/articles/investing/072515/top-factors-reports-affect-price-
oil.asp
Macrotrends. (2017, July 28). Crude Oil Prices-70 Year Historical Chart. Retrieved from
http://www.macrotrends.net/: http://www.macrotrends.net/1369/crude-oil-price-history-
chart
Steven Levine, Gary Taylor, Daniel Arthur, Michael Tolleth. (2014). Understanding Crude Oil
and Product Markets. American Petroleum Institute.
Williams, K. (2008). The International Oil Market:An Application of the Three-Agent Model.
Bank of Jamaica.