Crude oil, also known as the “black gold,” is one of the most demanded global commodities, as it is an important part of our everyday lives and has a major contribution to the worldwide economic system. Its production started to gain momentum in 1910, with the United States being the dominant provider for all the first half of the 20th Century; followed by Mexico, Venezuela, Russia, Indonesia and the Middle East.
Initially, in the United States, the rights of an oil reservoir didn’t belong to the state, but rather to the landholder of the exact property where the commodity was found. The nationalization of oil supplies began in 1960, when the Organization of the Petroleum Exporting Countries (OPEC) was formed by its first five members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC’s missing as it is stated on their official website today1, was “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”
Until 1970 and even beyond, the oil market functioned as a network of oil companies. All the fundamental processes were taking place individually, within each company – the commodity would go from the extraction area to the refiner, and afterwards to the marketer. There were only a small number of transactions on the market, and were known as posted prices, which basically represented the offer prices of the companies.
The Oil Market in the Present Days
In the 2000s, the ease & low-costs of transportation and the increasing demand for crude oil shaped the operating way of the market. The prices of this commodity are now determined by a series of aspects, which are of great importance for investors. Some of the main factors2 are the supply and demand balance, the crude oil costs, the decisions made by the OPEC, global events of economic or political nature, as well as the weather conditions or natural disasters. In addition, the crude oil benchmarks can be a valuable indicator, since they serve as a reference price for buyers & sellers. The most traded oil benchmarks3 are the West Texas Intermediate (WTI) Crude, the Brent Blend Crude, and the Dubai Crude. Given that the WTI and the Brent Blend benchmarks are often compared – their price difference is known as the Brent-WTI spread.
As of January 2019, OPEC has 17 member countries, including Saudi Arabia and Venezuela. In 2017, according to OPEC’s data portrayed on their official website 81.89% of the world’s proven oil reserves were located in OPEC Member Countries, with the bulk oil reserves in the Middle East amounting to 65.36% of the OPEC total4. The organization has a decisive control over the oil production and its activities have the power to move the oil prices substantially. As for the supply and demand demeanor in America – the U.S. Energy Information Administration (EIA) keeps track of all activities and releases official data & analysis, and projections – capable of generating reactions on the oil market.
Last year ended with the oil prices strongly decreasing at around $8/b. According to the oil news portal About Energy5, after the Federal Reserve announced the fourth increase of the interest rates, the European and Asian benchmark, as well as the American grade reached their minimum on December 24th. The Brent Blend decreased at $50.68/b – the lowest level since August 18th 2017 and the WTI at $42.38/b – the minimum price since August 10th 2016. However, the data6 released by U.S. Energy Information AdministrationEIA showed the U.S. exports of crude oil continued to increase to 2.0 million barrels per day (b/d), up 846,000 b/d (73%) from 2017, as the result of increasing U.S. crude oil production and infrastructure changes. In addition, the number of destinations for U.S. crude oil exports also increased from 37 to 42.
Oil Trading in 2019 – Highlights & Projections
In January, barrel prices strongly increased because OPEC and allies started to implement the Vienna agreement7 reached on November 30th 2018 which aimed to cut production by 1.2 million b/d in order to remove the oversupply in the oil market. The International Energy Agency released a report8 which can be found on their official website according to which the global oil production fell by 340 kb/d in February as OPEC and allies deepened the production cuts; and projected that the non-OPEC growth will slow from 2018’s record 2.8 mb/d to 1.8 mb/d in 2019.
Jet fuel demand in the U.S. remained strong in February9, according to the American Petroleum Institute, however, the recent crash of a Boeing (NYSE:BA) 737 Max 8 plane in Ethiopia has led several countries around the world, including the United States, to ground these airplanes. We have yet to wait and see if there will be a drop in jet fuel demand in the following months. In addition, the increasing concerns regarding climate change determined oil giants like Royal Dutch Shell and Equinor to address this matter and approach user-friendly business strategies. Shell aims to become the “world’s largest power company” by the beginning of the 2030s10 and has been selling from its upstream oil assets and purchased renewable energy assets instead.
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- Organization of the Petroleum Exporting Countries, opec.org, https://www.opec.org/opec_web/en/about_us/23.htm
- U.S. Energy Information Administration, “Oil Prices and Outlook – Basics”, Mar, 30, 2018, eia.gov, https://www.eia.gov/energyexplained/print.php?page=oil_prices
- “Understanding Crude Oil Benchmarks and Classifications”, oilscams.org, http://www.oilscams.org/crude-oil-benchmarks
- Organization of the Petroleum Exporting Countries, “OPEC Share of World Crude Oil Reserve”, opec.org, https://www.opec.org/opec_web/en/data_graphs/330.htm
- Aboutenergy.com, “Monthly Review”,aboutenergy.com, https://www.aboutenergy.com/en_IT/oil-prices.page
- U.S. Energy Information Administration, “This Week in Petroleum”, eia.gov, https://www.eia.gov/petroleum/weekly/
- Tom DiChristopher, Sam Meredith , “OPEC and allies agree to cut oil production by 1.2 million barrels per day”, Dec, 7, 2018, cnbc.com, https://www.cnbc.com/2018/12/07/opec-meeting-saudi-arabia-and-russia-look-to-impose-production-cuts.html
- International Energy Agency, “Oil market report”, https://www.iea.org/oilmarketreport/omrpublic/
- The American Petroleum Institute, “API’s Monthly Statistical Report”, api.org, https://www.api.org/products-and-services/statistics/api-monthly-statistical-report
- Utilityweek.co.uk, “Shell plans to become ‘world’s largest power company’ by early 2030s”, utilityweek.co.uk, https://utilityweek.co.uk/shell-plans-become-worlds-largest-power-company-early-2030s/