When markets trade crude oil, what exactly is this commodity that is given so much media coverage and whose price changes capture the imagination of us all?
Crude oil or petroleum is a naturally occurring, flammable mixture of hydrocarbon (molecules containing carbon and hydrogen) liquids and some other compounds and traces of metals.
There are different grades of crude oil, some called light sweet, with a higher concentration of the smaller hydrocarbons and less than 0.5% sulphur, and sour crude containing higher levels of sulphur and with the larger hydrocarbons.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3!
When we refer to the term crude oil it covers more than just the mainstream hydrocarbon liquid.
Other elements include gas condensate, natural gas liquids, shale oil and oil sands.
The latter is considered to provide a growing source of future crude oil, though it is a heavy grade mixed with sand.
Where is crude oil found?
While there are producers across the globe, the main concentration is in the Middle East which accounts for over 60% of worldwide production.
Often the distinction is made between OPEC producing countries and non-OPEC producers.
Consumers and commodity markets
When the commodity markets trade crude oil this is the financial end of the process, while in the real world crude oil is being extracted out of the ground, transported to refineries through pipelines, and then often shipped in tankers to consuming markets worldwide.
A look at the various commodity indexes which reflect the range of natural resources will show that energy tends to be the main component and within that, crude oil is the biggest contributor.
As well as including the crude oil, weighting is also given to the various derivatives formed during the distillation process at the refineries, such as gasoline, RBOB, heating oil and diesel.
It is also possible to gain exposure to movements in the price of crude oil and its derivatives by trading or investing in exchange traded funds or ETF’s exposed to the energy sector.
Crude Oil has a number of benchmarks which act as a barometer for the price and direction of the oil market.
How much oil is left?
This has been a subject of speculation for years, ever since the Hubbert Peak predicted the approach of “Peak Oil”, after which reserves are depleted and output levels are hard to maintain.
The consensus is that it is hard to be certain about the accuracy of some of the stated petroleum reserves published by producers, with Peak Oil advocates suggesting these figures are overstating remaining reserves.
With the surge in demand for crude oil and other natural resources from the emerging economies like China and India set to continue for the foreseeable future, the long term upward pressure on prices is likely to remain.
Add to this that most of the easy oil has been discovered and many of the large established fields are quite old, it may be difficult for supply to keep up with the demand.
New trends in technology and climate change
Crude oil has a wide range of applications in the global economy from agriculture to all forms of transport, heating, powering industrial processes and in the formation of many products made using various plastics.
The climate change impact of burning fossil fuels is a constraint that all consuming nations need to consider in developing alternative materials and processes to maintain their economic growth and welfare of their societies.
It is likely that commodity trading in alternatives to crude oil, such as new biofuels and use of hydrogen in transport in particular, will develop in the near future.
In the meantime, however, as political leaders look to address the impact of high oil prices on their economies, the markets will continue their momentum and trade crude oil.
Write Your Article on Crude Oil Here!
Do you have your take on the latest issues in the oil market?
Now YOU can put your view across here. And others can comment on your piece.
What Other Visitors Have Said
Click below to see contributions from other visitors to this page...