CRUDE OIL PRICES FUNDAMENTALS AND TECHNICALS

Anupam Basu

Introduction

What is crude oil?

• Crude oil is a naturally-occurring substance found in certain rock formations in the earth.

• It is a dark, sticky liquid classified as a hydrocarbon. This means, it is a compound containing mainly carbon and hydrogen.

• Crude oil is highly flammable and can be burned to create energy.

History of Oil:-• The first commercial oil well drilled in Romania in 1857. • The Indian petroleum industry is also one of the oldest in

the world, with Oil being struck at Makum near Margherita in Assam in 1867.

• In 1889 in Digboi in Assam first oil was struck by Burma oil company.

• At the beginning of the 20th century oil supplied only 4% of the world’s energy but know it has become the most important energy source and supplies about 37% of the world’s energy.

• Since the shift from coal to oil, the world has consumed over 875 billion barrels. Another 1,000 billion barrels of proved and probable reserves remains to be recovered.

Components of Oil:-

• The exact molecular composition varies widely from formation to formation but the proportion of chemical elements vary over fairly narrow limits as follows:

Carbon -- 83-87%Hydrogen --10-14%Nitrogen--0.1-2%Oxygen--0.1-1.5%

Sulfur--0.5-6%Metals-- <1000ppm

Classification:-• The petroleum industry generally classifies crude oil by:-1. The geographic location it is produced in.2. Its API gravity.3. By its sulfur content.

1. According, to the geographic location some of the types are Brent crude, WTI (West Texas Intermediate) crude etc. The geographic location is important because it affects transportation costs to the refinery.

2. API ( American Petroleum Institute) Gravity:-A specific gravity scale developed by the American Petroleum Institute (API) for measuring the relative density of various petroleum liquids, expressed in degrees. It is given by:-

API Gravity = 141.5/ specific gravity – 131.5

• Eg:- API of water = 10. (Because S.G. of water=1).

API values of some other crude oils are:-• Crude from Bombay High 35-38• Gulf 25-28• Venezuela 15

3. According to sulfur content:- Crude oil is referred to as Sweet if it contains relatively little sulfur or Sour if it contains substantial amounts of sulfur.

Sweet oil commands a higher price than Sour oil because it has fewer environmental problems and requires less refining to meet sulfur standards.

• Crude oil may be considered light if it has low density (or high API Gravity) or heavy if it has high density (or low API Gravity).

Light crude oil is more desirable than heavy oil since it produces a higher yield of gasoline.

Fundamental factors affecting crude oil prices

• World oil demand• World oil supply• Weather conditions• GDP• Government policy• Political Conditions• Futures Market

Technical factors affecting Crude oil prices

• Hedging:- A hedge is a position established in one market in an attempt to offset exposure to price fluctuations. So, we can mitigate the risk of crude oil price fluctuations by hedging it.

http://bp3.blogger.com/_uzaxPlbcBLU/SEzOCF05kOI/AAAAAAAAAI8/Id_vrBwK8MQ/s1600-h/cartoon%2Bgas%2Bprices.jpg