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Price of oil

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This article is about the price of crude oil. For information about derivative motor fuels, see gasoline and diesel usage and pricing. For detailed history of price movements since 2003, see World oil market chronology from 2003.
Oil prices, 1861–2011 (1861–1944 averaged US crude oil, 1945–1983 Arabian Light, 1984–2011 Brent). Red line adjusted for inflation, blue not adjusted. Due to exchange rate fluctuations, the red line represents the price experience of U.S. consumers only (linear graph).
Long-term oil prices, 1861–2011 (logarithmic graph)
Brent barrel petroleum spot prices since May 1987. Due to exchange rate fluctuations, the real price line is only relevant to the United States and countries with a currency tied to the U.S. dollar at a constant rate throughout the period.
Weekly reports on crude oil inventories or total stockpiles in storage facilities like these tanks have a strong bearing on oil prices

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.

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".

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]

The demand for oil is dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on global economic growth.[2]

Organization of the Petroleum Exporting Countries (OPEC)

Main article: OPEC

The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960[3] 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.

Chronology

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.[4] 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.[5] 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.[6]

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.[7] By January 2015 the price of benchmark crude oil, both Brent and West Texas Intermediate (WTI) reached below $50, with vanishing spread.[8] A record dip below $44 for WTI (with Brent near $54) was reached at mid March 2015.[9] The WTI price increased in the $60 (WTI) and $65 (Brent) region in the following months. Oil prices decreased to a six-year low $38 on Monday, August 24, 2015.[10] [11]

History

Further information: 1967 Oil Embargo, 1973 oil crisis, 1979 energy crisis, 1980s oil glut, and Oil price increase of 1990

Price history from 2003 onwards

Main article: World oil market chronology from 2003
Further information: 2000s energy crisis

Benchmark pricing

Main article: Benchmark (crude oil)

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.[12] 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.[12] The current reference, or pricing markers, are Brent, WTI, and Dubai/Oman.[12]

Market listings

Main article: Commodity market

Oil is marketed among other products in commodity markets. See above for details. Widely traded oil futures, and related natural gas futures, include:[13]

  • Petroleum
    • 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.[14]

Speculation

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.[15] 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.[16] This announcement has received wide coverage in the financial press, with speculation about oil futures price manipulation.[17][18][19]

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.

2014–2015 global oversupply

By 12 December 2014, the price of benchmark crude oil, both Brent and WTI reached their lowest prices since 2009. Brent crude oil and accordingly to all type of Crude Oil dropped to US$62.75 a barrel for January delivery on the London-based ICE Futures Europe exchange and futures for West Texas Intermediate (WTI) for January settlement slid to $58.80 a barrel in electronic trading on the New York Mercantile Exchange (NYME). This represents a 40 percent decrease in 2014.[20] The CIBC reported that the global oil industry continued to produce massive amounts of oil in spite of a stagnant crude oil market. Oil production from the Bakken formation was forecast in 2012 to grow by 600,000 barrels every year through 2016. By 2012 Canadian tight oil and oil sands production was also surging.[21]

In June 2014 crude oil prices dropped by about a third as U.S. shale oil production increased and China and Europe's demand for oil decreased. In spite of huge global oversupply, on 27 November 2014 in Vienna, Saudi Oil Minister Ali al-Naimi blocked the appeals from the poorer OPEC member states, such as Venezuela, Iran and Algeria, for production cuts. The European crude oil benchmark, Brent, plunged to US$71.25, a four-year low. Al-Naimi argued that the market would be left to correct itself, this will put pressure on companies in the US to reduce shale fracturing operations. OPEC had a "long-standing policy of defending prices." OPEC is ready to let the Brent oil price drop to $60 to slow down US shale oil production.[22] In spite of a troubled economy in member countries, al-Naimi repeated his statement on Saudi inaction on 10 December 2014.[23] By the end of 2014, as the demand for global oil consumption continued to decline, the remarkably rapid oil output growth in ‘light, tight’ oil production in the North Dakota Bakken, the Permian and Eagle Ford Basins in Texas, while rejuvenating economic growth in "U.S. refining, petrochemical and associated transportation industries, rail & pipelines, destabilized international oil markets."[24]

In early 2015, the US oil price fell below $50 per barrel dragging Brent oil to just below $50 as well.[25]

Steve Briese, a commodity analyst, who had forecasted in March 2014 a decline to world price to $75 from $100, based on 30 years of extra supply[26] in early December 2014 projected a low of $35 a barrel.[27] On Jan 8, 2015 commodity hedge fund manager Andrew J. Hall suggested that $40-a-barrel is close to “an absolute price floor,” adding that a significant amount of U.S. and Canadian production can’t cover the cash costs of operating at that price.[28]

In mid-January 2015, Goldman Sachs predicted the U.S. oil benchmark to average $40.50 a barrel and Brent to average $42 a barrel in the second quarter. For the year, Goldman sees Brent prices averaging $50.40 and for the U.S. benchmark, $47.15 a barrel in 2015, down from $73.75.[29]

In 16 April the price of WTI hit a high of $56.52 for 2015 following the publication of the monthly review by the Organization of the Petroleum Exporting Countries in which it was reported that oil production in the United States had peaked and would start to decline in the third quarter thereby easing the global glut of crude.[30]

America's paradox: Hydraulic fracturing shale oil is still profitable

According to Bloomberg Business, the efficiency of [31] newer shale oil wells that use hydraulic fracturing in the United States, combined with the US$12 million upfront well drilling and construction costs, provide incentives to oil producers to continue to flood the already glutted market with under-priced oil in spite of crude oil storage limitations.[31] Many less efficient and less productive older wells were shut down but these shale oil wells continue to increase production while making a profit in a market where crude oil is priced as low as US$50 a barrel.[31]

Oil-storage trade (Contango)

Main article: Oil-storage trade
The Knock Nevis (1979-2010), a ULCC supertanker compared to the longest ships ever built.

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.[32]

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.[33] But it was in 2007 through 2009 the oil storage trade expanded.[34] 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.[35] By May, 2007 Cushing's inventory fell by nearly 35% as the oil-storage trade heated up.[35]

"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 were being used more for temporary storage of oil, rather than transportation.[36]

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."[37]

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.[32] Traders and producers can buy and sell the right to store certain types of oil.[32]

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.[32] 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.[32]

Comparative cost of production

In this table based on the Scotiabank Equity Research and Scotiabank Economics report published 28 November 2014,[24] 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
Saskatchewan Bakken US$47
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."[24]

Future projections

Main articles: Oil depletion and Peak oil

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.”[38] 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." [39]

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.[40]

Declining oil prices may boost consumer oriented stocks but may hurt oil-based stocks.[41][42] It is estimated that 17-18% of S&P would decline with declining oil prices.

The oil importing countries like Japan, China or India would benefit, however the oil producing countries would lose.[43][44][45] A Bloomberg article presents results of an analysis by Oxford Economics on the GDP growth of countries as a result of the 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.[46]

Katina Stefanova has argued that falling oil prices do not imply a recession and a decline in stock prices.[47] 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.[48]

See also

References

  1. ^ Mouawad, Jad (2008-03-08). "Oil Prices Pass Record Set in ’80s, but Then Recede", New York Times http://www.nytimes.com/2008/03/03/business/worldbusiness/03cnd-oil.html?hp&_r=0
  2. ^ "Publications" (PDF). Retrieved 5 January 2015.
  3. ^ http://www.slate.com/id/2170040/nav/tap3/ , http://wps.aw.com/aw_carltonper_modernio_4/0,9313,1424964-content,00.html
  4. ^ Rising Demand for Oil Provokes New Energy Crisis, JAD MOUAWAD, New York Times, November 9, 2007
  5. ^ http://tonto.eia.doe.gov/dnav/pet/hist/rwtcd.htm
  6. ^ "BBC News - Egypt unrest pushes Brent crude oil to $100 a barrel". BBC News. 31 January 2011. Retrieved 5 January 2015.
  7. ^ Nicole Friedman (31 December 2014). "U.S. Oil Falls 46%, Steepest Yearly Loss Since 2008 - WSJ". WSJ. Retrieved 5 January 2015.
  8. ^ Nick Cunningham (14 January 2015). "The Vanishing WTI/Brent Spread". WSJ. Retrieved 14 June 2015.
  9. ^ Nick Cunningham (16 March 2015). "The Reemergence Of The WTI/Brent Spread". WSJ. Retrieved 14 June 2015.
  10. ^ Sara Sjolin (24 August 2015). "Crude's drop below $38 marks 'epic' time in the oil market". MarketWatch. Retrieved 24 August 2015.
  11. ^ Nicole Friedman (24 August 2015). "Oil Plunges Amid Broad Commodities Selloff". WSJ. Retrieved 24 August 2015.
  12. ^ a b c Mabro, Robert (2006). Oil in the 21st century: issues, challenges and opportunities. Oxford Press. p. 351. ISBN 9780199207381. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  13. ^ "Bloomberg Energy Prices". Bloomberg.com. Retrieved 2008-06-11.
  14. ^ List of Commodity Delivery Dates on Wikinvest
  15. ^ Ed Wallace (June 27, 2008). "Oil Prices Are All Speculation". Business Week.
  16. ^ "CFTC Announces Multiple Energy Market Initiatives". CFTC. Release: 5503-08. May 29, 2008. Archived from the original on 2008-06-01. Retrieved 2008-06-11.
  17. ^ "CFTC in talks to plug the 'London loophole'". The Financial Times. 2008-06-10. Retrieved 2008-06-11.
  18. ^ Mufson, Steven (2008-05-30). "Probe of Crude Oil Trading Disclosed". Washington Post. Retrieved 2008-06-11.
  19. ^ "Government investigates oil markets". CNN Money. 2008-05-30. Retrieved 2008-06-11. {{cite news}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help) [dead link‍]
  20. ^ "WTI Oil extends drop below $60 as IEA cuts forecast; Brent falls", Bloomberg News, 12 December 2014, retrieved 12 December 2014
  21. ^ "Why price discounts for Canadian crude are here to stay", Alberta Oil, 1 September 2012, retrieved 8 December 2014
  22. ^ Lawler, Alex; Sheppard, David; El Gamal, Rania (27 November 2014), Saudis block OPEC output cut, sending oil price plunging, Vienna: Reuters, retrieved 10 December 2014
  23. ^ Krishnan, Barani (10 December 2014), Oil crashes 5%, nears $60 on weak U.S. demand, Saudi inaction, London: Globe and Mail via Reuters, retrieved 10 December 2014
  24. ^ a b c Mohr, Patricia (28 November 2014), Scotiabank Commodity Price Index (PDF), retrieved 8 December 2014
  25. ^ US oil price falls below $50 on supply glut fears
  26. ^ Here Comes $75 Oil, GENE EPSTEIN, Barrons, March 29, 2014
  27. ^ The Case for $35 a Barrel Oil, Gene Epstein, Dec. 6, 2014
  28. ^ Renowned Trader Hall Sees $40 Oil ‘Absolute Price Floor’, Bradley Olson and Simone Foxman, Bloomberg, Jan 8, 2015
  29. ^ Friedman, Nicole (12 January 2015), "Oil Prices Fall to Fresh Lows", Wall Street Journal, New York
  30. ^ Friedman, Nicole (16 April 2015), "Oil Prices Hit a 2015 High on Hopes U.S. Production Will EaseLight, sweet crude for May delivery settled up 32 cents to $56.71 a barrel on the New York Mercantile Exchange", Wall Street Journal, New York, retrieved 16 April 2015
  31. ^ a b c "Why Cheap Oil Doesn't Stop the Drilling", Bloomberg, 5 March 2015, retrieved 6 March 2015
  32. ^ a b c d e Friedman, Nicole (5 March 2015), "Oil Glut Sparks Latest Dilemma: Where to put it all as storage tanks near capacity, some predict spillover will send crude prices even lower", Wall Street Journal, retrieved 6 March 2015
  33. ^ Yglesias, Matthew (25 December 2014), "Why speculators are stashing vast quantities of crude oil on tanker ships", VOX, retrieved 21 January 2015
  34. ^ Norris, Michele (17 December 2008). "Contango In Oil Markets Explained".
  35. ^ a b Davis, Anne (6 October 2007). "Where Has All The Oil Gone? After Sitting on Crude, speculators Unload It. The World's Eyes Fall on Cushing, Oklahoma". Wall Street Journal.
  36. ^ Wright, Robert (17 November 2009). "Tankers store oil as futures prices rocket". Financial Times. London, UK.
  37. ^ "Oil traders to store millions of barrels at sea as prices slump". Reuters. 13 January 2015. Retrieved 20 January 2015.
  38. ^ DOE Hirsch Report
  39. ^ http://www.un.org/en/development/desa/policy/wesp/wesp_current/wesp2014.pdf
  40. ^ The Soviet Collapse: Grain and Oil, By Yegor Gaidar, American Enterprise Institute, 2007
  41. ^ The surprising impact of plunging oil prices, Alex Rosenberg, CNBC, S5 Oct 2014
  42. ^ Here's What Falling Oil Prices Mean For 12 Stock Market Sectors, AKIN OYEDELE, NOV. 17, 2014, 2:21 PM
  43. ^ The Effect of Low Oil Prices: A Regional Tour, Credit Suisse Report
  44. ^ Falling Oil Spells Boon for Most of Asia’s Economies, ERIC YEP, Wall Street Journal, Jan. 4, 2015
  45. ^ Who Profits When Oil Prices Plunge?
  46. ^ How $50 Oil Changes Almost Everything, Isaac Arnsdorf and Simon Kennedy, Bloomberg, Jan 7, 2015
  47. ^ Do Falling Oil Prices Foreshadow a Slump in the Stock Market in 2015?, Katina Stefanova, Forbes, 12/31/2014
  48. ^ Black Dog: Are Plunging Oil Prices a Positive or a Negative?, Liz Ann Sonders, November 3, 2014
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