Price of oil
The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location.
As with all commodities, the oil price is determined by the balance between supply and demand. The supply of oil is dependent on geological discovery, the legal and tax framework for oil extraction, the cost of extraction, the availability and cost of technology for extraction, and the political situation in oil-producing countries. Both domestic political instability in oil producing countries and conflicts with other countries can destabilise the oil price. For example, the Iranian Revolution of 1979 led to a jump in oil prices.
- 1 Organization of the Petroleum Exporting Countries (OPEC)
- 2 History
- 3 Benchmark pricing
- 4 Market listings
- 5 Speculation
- 6 2008 CFTC investigation
- 7 Oil-storage trade (Contango)
- 8 Comparative cost of production
- 9 Future projections
- 10 Impact of declining oil price
- 11 See also
- 12 References
- 13 External links
Organization of the Petroleum Exporting Countries (OPEC)
The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to try to counter the oil companies cartel, which had been controlling posted prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972.
Price history from 2003 onwards
From 1999 til mid 2008, the price of oil rose significantly. It was explained by the rising oil demand in countries like China and India. In the middle of the financial crisis of 2007–2008, the price of oil underwent a significant decrease after the record peak of US$145 it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the financial crisis of 2007–2010 began. The price sharply rebounded after the crisis and rose to US$82 a barrel in 2009. On 31 January 2011, the Brent price hit $100 a barrel for the first time since October 2008, on concerns about the political unrest in Egypt.
For about three and half years the price largely remained in the $90–$120 range. In the middle of 2014, price started declining due to a significant increase in oil production in USA, and declining demand in the emerging countries. By January 2015 the price of benchmark crude oil, both Brent and West Texas Intermediate (WTI) reached below $50, with vanishing spread. A record dip below $44 for WTI (with Brent near $54) was reached at mid March 2015. The WTI price increased in the $60 (WTI) and $65 (Brent) region in the following months. Oil prices decreased to a six-year low to $36 on December 11, 2015. Some analysts speculate that it may continue to drop further, perhaps as low as $18
In North America this generally refers to the WTI Cushing Crude Oil Spot Price West Texas Intermediate (WTI), also known as Texas Light Sweet, a type of crude oil used as a benchmark in oil pricing and the underlying commodity of New York Mercantile Exchange's oil futures contracts. WTI is a light crude oil, lighter than Brent Crude oil. It contains about 0.24% sulfur, rating it a sweet crude, sweeter than Brent. Its properties and production site make it ideal for being refined in the United States, mostly in the Midwest and Gulf Coast regions. WTI has an API gravity of around 39.6 (specific gravity approx. 0.827) per barrel (159 liters) of either WTI/light crude as traded on the New York Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma. Cushing, Oklahoma, a major oil supply hub connecting oil suppliers to the Gulf Coast, has become the most significant trading hub for crude oil in North America.
In Europe and some other parts of the world, the oil price benchmark is Brent as traded on the Intercontinental Exchange (ICE, into which the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe.
Other important benchmarks include Dubai, Tapis, and the OPEC basket. The Energy Information Administration (EIA) uses the imported refiner acquisition cost, the weighted average cost of all oil imported into the US, as its "world oil price".
After the collapse of the OPEC-administered pricing system in 1985, and a short lived experiment with netback pricing, oil-exporting countries adopted a market-linked pricing mechanism. First adopted by PEMEX in 1986, market-linked pricing received wide acceptance and by 1988 became and still is the main method for pricing crude oil in international trade. The current reference, or pricing markers, are Brent, WTI, and Dubai/Oman.
- Nymex Crude Future
- Dated Brent Spot
- WTI Cushing Spot
- Nymex Heating Oil Future
- Nymex RBOB (Reformulated Blendstock for Oxygenate Blending) Gasoline Future
- Natural gas
- Nymex Henry Hub Future
- Henry Hub Spot
- New York City Gate Spot
Most of the above oil futures have delivery dates in all 12 months of the year.
Business Week reported (2008-06-27) that the surge in oil prices prior to 2008 had led some commentators to argue that at least some of the rise was due to speculation in the futures markets. However, although speculation can greatly raise the oil price in the short run, in the long run fundamental market conditions will determine the oil price. Storing oil is expensive, and all speculators must ultimately, and generally within a few months, sell the oil they purchase.
2008 CFTC investigation
The U.S. Commodity Futures Trading Commission (CFTC) announced "Multiple Energy Market Initiatives" on May 29, 2008. Part 1 is "Expanded International Surveillance Information for Crude Oil Trading." The CFTC announcement stated it has joined with the United Kingdom Financial Services Authority and ICE Futures Europe in order to expand surveillance and information sharing of various futures contracts. This announcement has received wide coverage in the financial press, with speculation about oil futures price manipulation.
The interim report by the Interagency Task Force, released in July, found that speculation had not caused significant changes in oil prices and that fundamental supply and demand factors provide the best explanation for the crude oil price increases. The report found that the primary reason for the price increases was that the world economy had expanded at its fastest pace in decades, resulting in substantial increases in the demand for oil, while the oil production grew sluggishly, compounded by production shortfalls in oil-exporting countries.
The report stated that as a result of the imbalance and low price elasticity, very large price increases occurred as the market attempted to balance scarce supply against growing demand, particularly in the last three years. The report forecast that this imbalance would persist in the future, leading to continued upward pressure on oil prices, and that large or rapid movements in oil prices are likely to occur even in the absence of activity by speculators. The task force continues to analyze commodity markets and intends to issue further findings later in the year.
Oil-storage trade (Contango)
The strategy works because oil prices for delivery in the future are trading at a premium to those in the spot market - a market structure known in the industry as contango - with investors expecting prices to eventually recover from the near 60 percent slide in oil in the last seven months.— Reuters 2015
The oil-storage trade, also referred to as contango, a market strategy in which large, often vertically-integrated oil companies purchase oil for immediate delivery and storage—when the price of oil is low— and hold it in storage until the price of oil increases. Investors bet on the future of oil prices through a financial instrument, oil futures in which they agree on a contract basis, to buy or sell oil at a set date in the future. Crude oil is stored in salt mines, tanks and oil tankers.
Investors can choose to take profits or losses prior to the oil-delivery date arrives. Or they can leave the contract in place and physical oil is "delivered on the set date" to an "officially designated delivery point", in the United States, that is usually Cushing, Oklahoma. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. If the forward market is in "contango"—the forward price is higher than the current spot price—the strategy is very successful.
Scandinavian Tank Storage AB and its founder Lars Jacobsson introduced the concept on the market in early 1990. But it was in 2007 through 2009 the oil storage trade expanded. with many participants—including Wall Street giants, such as Morgan Stanley, Goldman Sachs, and Citicorp—turning sizeable profits simply by sitting on tanks of oil. By May, 2007 Cushing's inventory fell by nearly 35% as the oil-storage trade heated up.
"The trend follows a spike in oil futures prices that has created incentives for traders to buy crude oil and oil products at current rates, sell them on futures markets and store them until delivery."— Financial Post 2009
By the end of October 2009 one in twelve of the largest oil tankers was being used more for temporary storage of oil, rather than transportation.
From June 2014 to January 2015, as the price of oil dropped 60 percent and the supply of oil remained high, the world's largest traders in crude oil purchased at least 25 million barrels to store in supertankers to make a profit in the future when prices rise. Trafigura, Vitol, Gunvor, Koch, Shell and other major energy companies began to book booking oil storage supertankers for up to 12 months. By 13 January 2015 At least 11 Very Large Crude Carriers (VLCC) and Ultra Large Crude Carriers (ULCC)" have been reported as booked with storage options, rising from around five vessels at the end of last week. Each VLCC can hold 2 million barrels."
In 2015 as global capacity for oil storage was out-paced by global oil production, and an oil glut occurred. Crude oil storage space became a tradable commodity with CME Group— which owns NYMEX— offering oil-storage futures contracts in March 2015. Traders and producers can buy and sell the right to store certain types of oil.
By 5 March 2015, as oil production outpaces oil demand by 1.5 million barrels a day, storage capacity globally is dwindling. Crude oil is stored in old salt mines, in tanks and on tankers. In the United States alone, according to data from the Energy Information Administration, U.S. crude-oil supplies are at almost 70% of the U. S. storage capacity, the highest to capacity ration since 1935.
Comparative cost of production
In this table based on the Scotiabank Equity Research and Scotiabank Economics report published 28 November 2014, economist Mohr compares the cost of cumulative crude oil production in the fall of 2014.
|Place||Cost of production in northern hemisphere autumn 2014|
|Saudi Arabia||US$10–25 per barrel|
|Montney Oil Alberta and British Columbia||US$46|
|Eagle Ford, USA Shale+||US$40–50 (+ Liquids-rich Eagle Ford plays, assuming natural gas prices of US$3.80 per mmbtu)|
|Lloyd & Seal Conventional Heavy, AB||US$50|
|Conventional Light, Alberta and Saskatchewan||US$58.50|
|Nebraska USA Shale||US$58.50|
|SAGD Bitumen Alberta||US$65|
|North Dakota Bakken, Shale||US$54–79|
|Permian Basin, TX Shale||US$59–82|
|Oil sands legacy projects||US$53|
|Oil sands mining and infrastructure new projects||US$90|
This analysis "excludes "'up-front' costs (initial land acquisition, seismic and infrastructure costs): treats 'up-front' costs as 'sunk'. Rough estimate of 'up-front' costs = US$5–10 per barrel, though wide regional differences exist. Includes royalties, which are more advantageous in Alberta and Saskatchewan." The Weighted average of US$60-61 includes existing Integrated Oil Sands at C$53 per barrel."
Peak oil is the period when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. It relates to a long-term decline in the available supply of petroleum. This, combined with increasing demand, will significantly increase the worldwide prices of petroleum derived products. Most significant will be the availability and price of liquid fuel for transportation.
The US Department of Energy in the Hirsch report indicates that "The problems associated with world oil production peaking will not be temporary, and past "energy crisis" experience will provide relatively little guidance." The 2014 United Nations World Economic Situation and Prospects report notes that "Oil prices were on a downward trend in the first half of 2013 (after a spike in January and February caused by geopolitical tensions with Iran), as global demand for oil weakened along with the deceleration in world economic growth overall." 
Impact of declining oil price
A major rise or decline in oil price can have both economic and political impacts. The decline on oil price during 1985-1986 is considered to have contributed to the fall of the Soviet Union. Low oil prices could alleviate some of the negative effects associated with the resource curse, such as authoritarian rule and gender inequality. Lower oil prices could however also lead to domestic turmoil and diversionary war. The reduction in food prices that follows lower oil prices could have positive impacts on violence globally.
Research shows that declining oil prices make oil-rich states less bellicose. Low oil prices could also make oil-rich states engage more in international cooperation, as they become more dependent on foreign investments. The influence of the United States reportedly increases as oil prices decline, at least judging by the fact that "both oil importers and exporters vote more often with the United States in the United Nations General Assembly" during oil slumps.
Lower oil prices lead to greater global trade.
The oil importing countries like Japan, China or India would benefit, however the oil producing countries would lose. A Bloomberg article presents results of an analysis by Oxford Economics on the GDP growth of countries as a result of a drop from $84 to $40. It shows the GDP increase between 0.5% to 1.0% for India, USA and China, and a decline of greater than 3.5% from Saudi Arabia and Russia. A stable price of $60 would add 0.5 percentage point to global gross domestic product.
Katina Stefanova has argued that falling oil prices do not imply a recession and a decline in stock prices. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, had earlier written that that positive impact on consumers and businesses outside of the energy sector, which is a larger portion of the US economy will outweigh the negatives. Taking cues from a legendary oil investor, Harold Hamm, ranked as one of the richest men in the world by Forbes, Shawn Baldwin, Chairman of alternative investment firm The AIA Group, speculates that oil prices will rise by year-end 2016 from current levels.
2010s oil glut
Economists have observed that the 2015-2016 oil glut also known as 2010s oil glut started with a considerable time-lag, more than six years after the beginning of the Great Recession: "the price of oil [had] stabilized at a relatively high level (around $100 a barrel) unlike all previous recessionary cycles since 1980 (start of First Persian Gulf War). But nothing guarantee[d] such price levels in perpetuity".
It has also been argued that the collapse in oil prices in 2015 should be very beneficial for developed western economies, who are generally oil importers and aren't over exposed to declining demand from China.
January 2016 Price
According from many well known sources, the price of oil fell rapidly in the month of January 2016 causing the cost of WTI crude to fall to a 10-year low of $26.55 (On January 20). The average price of oil in January is well below $35 and that is expected to continue to at least July.
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