Oil is a vital commodity that fuels the global economy and influences geopolitics. Its prices are shaped by various factors, including supply and demand, geopolitical events, and technological advancements. While it remains crucial for energy and manufacturing, its environmental impact necessitates a shift towards more sustainable energy sources. Understanding oil as a commodity helps in grasping its role in the global market and the broader implications for the environment and economies worldwide.
What is Crude Oil?
Crude oil is a naturally occurring fossil fuel composed primarily of hydrocarbons. It is extracted from the earth and refined into various products such as gasoline, diesel, jet fuel, and heating oil.
Types of Crude Oil
Light Crude
Light crude oil has a low density and flows freely at room temperature. It yields a high proportion of valuable products like gasoline and is typically more expensive.
Heavy Crude
Heavy crude oil is denser and more viscous. It requires more processing to convert into refined products and is usually cheaper than light crude.
Major Oil Benchmarks
Brent Crude
Sourced from the North Sea, Brent Crude is the leading global benchmark for oil prices. It is light and sweet, making it ideal for refining.
It is worth knowing the Brent Crude oil does not only come from the Brent oil field; it also comes from the oil fields Forties, Oseberg, Ekofisk, and Troll. All five oil fields are in the North Sea.
Since the oil platforms that extract Brent Crude are out at sea, the oil can be loaded directly onto big freight ships and transported around the world.
An estimated 80% of all crude oil contracts around the world reference Brent crude, making it the most widely used marker for crude oil speculation.
West Texas Intermediate (WTI)
Sourced in the United States, WTI is another key benchmark. It is very light and sweet, making it highly desirable for gasoline production.
West Texas Intermediate (WTI) referes to oil extracted from wells in the United States and sent via pipeline to Cushing, Oklahoma. Since it is extracted on land and sent to a land-locked location, it is comparatively expensive to transport to other parts of the world.
WTI is the main benchmark for oil consumed in the United States.
Dubai
While Brent is the dominating benchmark globally, and WTI is the main benchmark for oil consumed in the United States, Dubai has become especially influential in the Asian market and is the main reference for Persian Gulf oil delivered to the Asian market.
It is not just comprised of oil from Dubai; it consists of a basket of crude from Dubai, Oman, and Upper Zakum. It is considered lower grade crude than WTI and Brent, as it is heavier and not sweet. The higher sulfur content in this oil makes it a so called “sour” crude oil.
OPEC Basket
This is a weighted average of oil prices from member countries of the Organization of the Petroleum Exporting Countries (OPEC). It provides a broad view of global oil prices.
Importance of Oil
Economic Impact
Oil is a critical energy source that drives global economies. It fuels transportation, powers industries, and is a raw material for numerous products, including plastics and many chemicals.
Geopolitical Influence
Oil production and pricing significantly impact global politics and economies. Countries with large oil reserves often wield considerable geopolitical power.
Trading Oil
Spot Market
Prices in the spot market reflect current supply and demand conditions.
Derivatives
Oil derivatives, such as options and swaps, allow traders to speculate on future oil prices or hedge against price volatility.
What are Futures Contracts?
Oil futures contracts are standardized agreements to buy or sell oil at a predetermined price on a specific date in the future. They are traded on exchanges like the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
Examples of Factors Influencing Oil Prices
Global oil prices are primarily driven by supply and demand dynamics. Increased production or decreased demand can lower prices, while reduced production or increased demand can raise prices.
Geopolitical Events
Events such as wars, political instability, and trade disputes can disrupt oil supply and influence prices. Sometimes, even the worry about the supply potentially becoming reduced soon is enough to impact the price.
OPEC Decisions
OPEC’s production quotas and policies significantly impact global oil supply and prices.
Technological Advances
Advancements in extraction and refining technologies can affect production costs and supply, influencing oil prices.
Environmental Impact
Greenhouse Gas Emissions
Burning oil and its derivatives contributes significantly to greenhouse gas emissions, driving climate change.
Pollution
Oil extraction, transportation, and refining can cause environmental pollution, including oil spills and air and water contamination.