Estimating the premium/discount of crude oil grades over their base marker crude oils

Abstract

We have used data from following sources in the course of our study. We started the research on the factors that can affect oil prices (Farmer.A.Roger, 2014) and the methods that can be used to determine oil prices (Azevedo, 2016). Then we analyzed the historical fluctuations of the oil prices (Baumeister, 2016). Further we went ahead and looked at the various macroeconomic factors that can influence the oil prices (Ural, 2016) (Alsalman, 2015) and how in turn volatility of oil prices can affect the stock prices in a broader context (Drazen, 2000) (Popescu, 2016) (Pinho, 2016). BPCL is the sponsoring organization of this study and it has been assigned to us by the Supply Chain Management Centre. Crude oil grades could be broadly classified into Low Sulphur Grade Crude Oils and High Sulphur Grade Crude Oils based on their sulphur content. The official selling Prices (OSP) of low sulphur (LS) crude oils and high sulphur (HS) crude oils are linked with the prices of Brent crude oil and Dubai crude oil, respectively. The OSP of LS crude oil normally indicates the premium or discount over the price of Brent crude oil. Similarly, the OSP of HS crude oil normally indicates the premium or discount over the price of Dubai crude oil. The prices of Brent and Dubai crude oils are based on their market demand patterns, and the price difference between them gives a fair idea of which crude oil refiners procure based on their plant configurations. Whenever the Brent-Dubai price differential changes, the premium/discount of individual crude oil grades over their respective markers also changes. The premium/discount of individual crude oil grades is also affected by demand-supply. Based on past data provided by BPCL, we aim to estimate the premium/discount of crude oil grades over their base marker crude oils for different Brent-Dubai price differential ranges over the range of crude oil prices (for e.g., Brent crude oil ranges between $30/BBL to $100/BBL). This will ultimately give better insights into the type of crude oil that is to be procured by BPCL. In addition, we might expand the scope of the study to determine other factors (such as freight rates) that affect the premium/discount of individual crude oil grades, and how these could be related to basis risks.