Crude oil is used to meet more than 60% of the global energy needs today. Almost all industries are dependent either directly or otherwise on crude oil and its refined products like petrol, diesel, lubricants, heating oil, aviation gasoline, asphalt, lubricating oils etc. Most of the world's crude oil reserves are found in the Middle East, Africa, Eastern Europe and Central America. The Middle East has around 65% of the world's crude oil reserves. Different oil-producing areas yield significantly different varieties of crude oil. Annexure 1 gives the statistics for the world crude oil demand.

Organization of Petroleum Exporting Countries (OPEC), an organization of eleven developing countries that are heavily dependent on oil revenues for their income, controls almost 40% of the world's crude oil. The OPEC accounts for about 75 per cent of the world's proven oil reserves. OPEC exports represent 55 per cent of the oil traded internationally. The current Members of OPEC are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Crude oil prices have always been highly volatile due to various factors which affect the supply and demand of crude oil. The factors which influence the supply of crude oil are OPEC output and supply, terrorism, weather/storms, fires in refineries and well heads, war and any other unforeseen geopolitical factors that causes supply disruptions especially in the Middle East. The factors which affect the demand of crude oil are global demand particularly from emerging nations, economic cycles ,fluctuations in the value of the Dollar vis-à-vis other currencies, strategic storage of crude oil by countries, expected weather conditions etc.

Grades of Crude Oil

The color, composition and the consistency of the crude depend on the mixture of hydrocarbon molecules. The words "light" and "heavy" describe a crude oil's density and its resistance to flow (viscosity). Those crude which are low in metals and sulfur content, light in color and consistency, and flow easily, are known as "light." Less expensive, low-grade crude oils, which are higher in metals and sulfur content, and must be heated to become fluid, are known as "heavy." The term "sweet" is used to describe crude oil that is low in malodorous sulfur compounds such as hydrogen sulfide and mercaptans, and the term "sour" is used to describe crude oil containing high malodorous sulfur compounds.

The main North Sea Crude Grades are Brent, Forties, Osberg, North Sea Basket, Ekofisk, Statfjord and Flotta. Of these crudes the Brent Crude Oil with API gravity estimated at 38.5 degrees and a Sulphur content of 0.36% is used as a bench mark of European crudes. The physical Brent Crude oil represents commingled crude from the Brent and Ninian systems, slated to load at the Sullom Voe terminal.

The main grades of West African Crudes are Bonny Light, Qua Iboe, Brass River, Escravos, Forcados and Cabinda. Bonny Light produced mainly in Nigeria has APi gravity of 35 degrees and the Sulphur content is 0.2%.

The Persian Gulf grades consist of Dubai and Oman assessments, Murban, Lower Zakum, Qatar Land, Qatar marine and Banoco Arab Medium. The main grade is the Dubai and Oman assessments with API gravity of 37 degrees and a Sulphur content of 1.08%. This is a heavy crude.

The main grades of Asia Pacific crudes are Tapis, Belinda, Cossack, Jabiru, North West Shelf, Miri etc

The main grades of crude are West Texas Intermediate (WTI), Mars MOC and Mars, P-Plus WTI, WTI Calendar Delta, West Texas Sour(WTS), Light Louisiana Sweet(LLS),Heavy Louisiana Sweet(HLS), Engene Island, Wyoming Sweet, Bonito, Mars, Poseidon, Basrah Light, Alaska North Slope(ANS), Line 63, P-Plus Line 63, Thums, Kern River. West Texas Intermediate's API gravity is 39.6 degrees, and has 0.24 percent of sulfur.

India is the sixth largest consumer of oil. Crude and related products account for 30% of India's total energy consumption. Current consumption of oil amounts to 2.43 million bbl/day and only around 30% of this demand is met by indigenous production. The remaining 70% of crude oil is being imported. . Crude oil imports to India comprise of the Oman-Dubai sour grade crude, Brent dated sweet crude and also large quantities of Bonny light crude. The Indian import crude basket consists of the Oman-Dubai sour grade crude and Brent dated sweet crude in the ratio 57:42.

Annexure 2 gives statistics of India's crude oil and products imports and exports

The majority of India's roughly 5.4 billion barrels in oil reserves are located in the Mumbai High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshore Mumbai High field is by far India's largest producing field, with current output of around 260,000 barrels per day. India's average crude oil production for 2003 was 0.66 million barrel per day. India had net oil imports of over 1.4 million barrel per day in 2003.

Despite the marginal increase in the domestic production of crude oil in 2004-2005, India's crude oil imports have risen by five percent to 95.315 million tonnes during the same period. Crude oil imports rose from just over 90 million tonnes in 2003-04 to 95.314 million tonnes in 2004-05.Total domestic production of crude oil during 2004-05 was 34.05 million tonnes as against 33.37 million tonnes in the previous financial year. Recent Government estimates put India's oil demand for the year 2004-2005 at 111.9 million tonnes, a 4.2% increase over last year's demand. India's oil consumption is expected to grow rapidly to atleast 3 mn b/d by 2007 and 3.2 mn b/d by 2008. With the flat or lower domestic output which is plagued by low recovery rates, the import requirements will more than double. India imports crude oil from countries like Venezuela, Nigeria, Sudan, Iran and Kuwait.

With the exception of Reliance India Ltd's refinery at Jamnagar (Gujarat) and Essar Oil Refinery the other refineries in India are under the public sector companies like Indian Oil Corporation , Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd., Mangalore Refineries and Petrochemicals Ltd. etc. Indian Oil Corporation (IOC) has got refineries in Guwahati, Barauni, Koyali, Haldia, Mathura, Digboi and Panipat. Hindustan Petroleum Corporation Limited (HPCL) refineries are in Mumbai and Visakhpattanam. Bharat Petroleum Corporation Limited's (BPCL) refinery is in Mumbai. The refinery of Mangalore Refineries and Petrochemicals Limited (MRPL) is located in Mangalore. The Government is considering giving the boards of IOC and Oil India Ltd powers similar to that of OVL (ONGC Videsh Limited) for projects jointly undertaken, which will allow them to approve overseas projects involving investments up to $70 million or Rs 300 crore, whichever is less.

According to latest estimates India imports nearly 76% of its crude oil requirement. The crude oil import bill has risen by over 40% in the year 2004-05. Coupled with this is the oil companies' constraint of increasing domestic oil prices due to inflationary fears.

This makes it vital for the oil companies to have a mechanism where they can hedge their price risk. The rationale for introducing a domestic Brent crude oil contract can be stated as follows:

Brent Crude Oil Contract Specification

Schedule of the Opening Date and Expiry Date of Trading on Crude Oil Futures contracts

Note: Each Contract would run for a period of three months. On expiry of a near month contract a new far month contract would be introduced the next trading day.