Learn About Futures Insider for August 4, 2011 : Crude Oil

Sometimes mythic, often controversial, crude oil has been an important component of modern times. Crude oil comes in many colors and consistencies, from hydrocarbon rich reservoirs in Texas to the heavy oil sands of Canada and Venezuela. Usually named for their region of production as well as other factors, crude oil properties can include various elements including carbon, nitrogen, oxygen, sulfur, and metals. Due to international appeal and demand, there are different tradable crude oil contracts across the globe, but for the purposes of this report, specifications will focus on the NYMEX Light, Sweet crude oil contract.

Contract Size:1,000 US barrels or 42,000 gallons

Price Quote & Tick Size : Dollars and cents per barrel; minimum tick size is one cent per barrel or $10.00 per contract

Contract Months: All months

Trading Specs: Open outcry on NYMEX runs from 9:00 am to 2:30 pm ET. Electronic trading on Globex runs Sunday through Friday 6:00 pm until 5:15 pm with a 45 minute break each day.

Daily Price Limit: $10.00 per barrel or $10,000 per contract. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $10.00 per barrel in either direction. If another halt were triggered, the market would continue to be expanded by $10.00 per barrel in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session.

Trading Symbols: CL


Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Crude Oil Facts​

Crude oil is not limited to modern uses as history shows examples of petroleum products being applied for nearly four thousand years. However, there is no doubt that the volume of consumption and the variety of applications for crude oil exploded in the middle of the nineteenth century. First driven by the demand for kerosene and oil lamps, the introduction of the internal combustion engine sealed crude oil’s fate and ushered in the era of oil booms across the United States. As oil quickly overtook coal as the world’s leading fuel, it was only a matter of time before reservoirs began to be outpaced by demand and the first “energy crisis” hit in the 1970’s. In the 1980’s, increased production and lower demand led to an “oil glut”.

US imports in the last three decades are illustrated as follows:


Past performance is not indicative of future results.
**Data Courtesy of EIA

The most well known deposits of petroleum are porous rock formations in which the hydrocarbons that make up the oil are sealed within the rock by an impermeable rock above. These reservoirs are accessed by drilling and pumping. Unconventional oil deposits of heavy crude oil exist in oil sands or oil shales which contain migrating oil or trapped hydrocarbons. Heavier crude oil deposits are often more expensive or require a more intensive process to extract the oil.

Most geologists attribute the formation of oil to the compression and heating of organic materials over extremely long periods of geologic time. However, there is an alternate theory that suggests natural petroleum was formed from deposits which may date to the formation of the earth rather than biological origins.

World crude oil supply and demand stats are highlighted in the following:


Past performance is not indicative of future results.
**Data Courtesy of EIA


Past performance is not indicative of future results.
**Data Courtesy of EIA

Price highlights for this market include:

* When OPEC was formed in 1960, the price of oil was in the single digits.
* An oil embargo in the early 1970s helped push prices above $10 a barrel.
* Throughout the early 1980s, prices were supported above $30 and sometimes reached $40 a barrel as tensions played out between Iran and Iraq. Prices fell sharply in the middle of the decade due to an oil glut.
* The 1990 invasion of Kuwait and subsequent Gulf War send oil prices up over $40 a barrel to all time highs. The price spike is short lived as U.S. forces secure the area and oil supply lanes.
* A combination of an OPEC quota increase and the Asian Financial Crisis drive oil prices lower in 1998, eventually hitting a low just above $10 per barrel.
* Oil prices head higher from that low, eventually spiking over $37 following the events of September 11, 2001. The Iraq invasion in 2003 highlights the risk to Middle Eastern oil supplies and helps move oil prices back towards $40 a barrel.
* Hurricane Katrina spiked oil prices in 2005, with oil topping $70 a barrel.
* U.S. dollar weakness helps prices continue to move higher. Dips occur temporarily but geopolitical tensions thrust oil above $90 a barrel in 2007 and prices ride a wave of volatility above $100 to a high of $147.27 in the summer of 2008.
* Ebbing demand forecasts cause prices to retreat back towards a low near $30 a barrel but economic concerns and a continuing weakness in the U.S. dollar spur a recovery heading into 2009 and 2010.

Key terms for this market include:

Crack Spread – Based on the word cracking which is the word for breaking down crude oil into products at a refinery. A crack spread is a term used when referring to the price difference between crude oil and extracted products like gasoline or heating oil.

Light, sweet or sour crude oil – Oil comes in various colors and viscosities. Light, sweet crude oil has less sulfur and is lighter than sour crude oil. Light, sweet crude oil is usually in higher demand for refining into gasoline, kerosene and diesel.

Oil sands or tar sands – are semi-solids of crude oil, sand, and water. Usually sticky, sands need to be extracted in unconventional ways since they do not flow like those deposits used with well methods. Big deposits include Athabasca oil sands in Canada and Orinoco oil sands in Venezuela.

Key Uses​

Crude oil is normally taken to refineries for the hydrocarbon chemicals to be distilled into the common products consumers are all familiar with or to be mixed with chemicals to create other products including:

Diesel fuel
Gasoline
Jet Fuel
Kerosene
Natural Gas
Lubricants
Tar
Paraffin

Key Concerns​

Hubbert Peak Theory – A geologist working for Shell Oil in the middle part of the last century is widely recognized as the first person to predict an oil peak. M. King Hubbert noted that oil discoveries tended over time to form a bell shaped curve. He suggested that oil production over time would follow a similar path with production in the lower 48 states peaking between 1965 and 1970. Hubbert went on to predict global oil production would peak in the last five years of the 20th century.

Using his predictive curve, it appears as though 54 of the largest oil producing nations have already passed their peak of production and are in decline. However, controversy surrounds the theory since many regions lack transparency in accounting for oil reserves. Conclusions vary from intimating that the global peak has already passed to the optimistic notion that the peak will come in 2035. Fossil fuels are defined as finite and since supply can be a major factor when considering pricing – if not the most important – the implications of the theory are boundless.


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