Crude Oil

 

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Introduction
 
“Light Sweet Crude Oil”, also known as “Western Texas Intermediate” or WTI, is a US based crude oil having low-sulphur, low density and high API gravity. As it produces more gasoline and diesel fuel, when refined, compared to other “heavier” and “sour” crude oils; it commands a higher price in the market. This WTI crude oil being traded at the New York Mercantile Exchange (NYMEX) has become the global benchmark for pricing of all other types of crude oil traded across the world. Crude oil is one of the most volatile commodities traded chiefly because the way it affects the global economy as well as our dependency on its derivative products like gasoline, heating oil, furnace oil, etc.
 
Over 40% of the world’s energy source comes from crude oil and its products. With growing demand comes another great concern of resource depletion. Unlike agricultural commodities which are seasonally cultivated, crude oil availability across the world is limited and is not recyclable. In addition to this, the producers of oil invest heavily in finding newer oil wells despite resources being limited; giving rise to diminishing returns per unit invested. Moreover, rising geo-political interest also adds to the increasing participation and volatility in oil prices.
 
As crude oil is a heterogeneous mixture of hydrocarbon chains which are separated by the refining process to yield several different products with varying uses.
 
  • Gasoline – also known as petrol is used largely by automobiles for transportation
  • Diesel – used by automobiles and specific industries as fuel
  • Fuel oil – required by many industries as fuel in furnaces, boilers, etc
  • Kerosene – used for lighting and heating; also used for transportation, cooking and as pesticide
  • Jet Fuel – also known as Aviation Turbine Fuel (ATF), it is used by as fuel for airplanes
  • Lubricants
  • Wax
  • Petroleum coke – used as a solid fuel
  • Asphalt
  • Tar
 
Western Texas Intermediate (WTI): This is the US benchmark crude oil. It is a light, sweet crude oil with an API gravity of approximately 40 and a sulfur content of approximately 0.3%. The spot price of West Texas Intermediate is reported at Cushing, Oklahoma.
 
Globally, US and Canada are the largest consumers of oil on a per capital basis. The chart below shows region-wise consumption of crude oil across the globe. North America, Europe and Asia-Pacific form the largest consuming regions.
 
On the supply side, the Middle-East region owns more than a third of the world’s supply, followed by Europe & Eurasia and North America. The Asia-Pacific is now catching up based on recent oil discoveries. The Middle-East has the largest proven reserves of crude oil followed by Europe & Eurasia and South & Central America. New oil discoveries in Europe & Eurasia region and the Middle-East region caused proven reserves to increase in these areas, while the Asia-Pacific region has remained considerably constant in this regard.Saudi Arabia contributes 13% to the world crude oil production, followed by Russian Federation contributing 12% and next is USA with 8%.
 
USA is the largest consumer of crude oil followed by China & Japan, each contributing 23%, 10% & 6% respectively in the world’s consumption. India has a share of 3% of world’s consumption. Middle East region is the highest exporter of Crude Oil in the world contributing 45% followed by Former Soviet Union contributing 16% of exports of crude oil. The Europe region is the biggest importer of crude oil, followed by US, each contributing 28% & 25% respectively. These regions collectively import more than 50% of the world’s imports. Indian demand has picked up in the last few years owing to increased consumption of petrol and diesel. Industrial demand has also picked up thus increasing demand for furnace oil and other mid-distillates. Indian supply remains more-or-less constant at approximately 0.77 mn bbls per day which is around 27% of demand. The rest of the demand is met through imports, mainly from the middle-east. India imports a Dubai-Oman crude and Brent crude is the proportion of 62.3:37.7. India is a net-net importer of crude oil. In India, the oil and gas industry is partially administered. Prices of some products like petrol, diesel, jet fuel, etc. are fixed by the government on a periodic basis. Pricing of the remaining products are based on market based calculations, done by the refining companies themselves frequently. Since we are net importers of crude oil, we are exposed to price risk on the purchase side, while crucial products like petrol and diesel are sold at fixed prices in the market.