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Price of petroleum
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- This article is about the price of crude oil; see gasoline usage and pricing for information about derivative motor fuels.
The price of petroleum as quoted in news generally refers to the spot price of either WTI/Light Crude as traded on the New York Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange (ICE, into which the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe.
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- This article is about the price of crude oil; see gasoline usage and pricing for information about derivative motor fuels.
The price of petroleum as quoted in news generally refers to the spot price of either WTI/Light Crude as traded on the New York Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange (ICE, into which the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe. 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. The vast majority of oil is not traded on an exchange but on an over-the-counter basis. 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".
The demand for oil is highly dependent on global macroeconomic conditions. According to some economists, high oil prices generally have a large negative impact on the global economic growth. Others argue that the run-up in oil prices over the past few years actually led to an acceleration in global growth. The huge surpluses built up by oil exporting countries were recycled through sovereign wealth funds and the banking system and (through the money multiplier) greatly increased investments in emerging markets and helped hold down interest rates in the U.S.
The Organization of the Petroleum Exporting Countries (OPEC) was formed to control the price of oil, and essentially worked as a cartel.
Oil price has undergone a significant decrease since the record peak 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 global financial crisis began, and has been trading between US$35 a barrel and US$50 a barrel in 2009.
History
Recent price history
A recent low point was reached in January 1999 of $16 (all prices are in US$ per barrel), after increased oil production from Iraq coincided with the Asian financial crisis, which reduced demand. Prices then increased rapidly, more than doubling by September 2000 to $35, then fell until the end of 2001 before steadily increasing, reaching $40-50 by September 2004.
In October 2004, light crude futures contracts on the NYMEX for November delivery exceeded $53 and for December delivery exceeded $55. Crude oil prices surged to a record high above $60 in June 2005, sustaining a rally built on strong demand for gasoline and diesel and on concerns about refiners' ability to keep up.
This trend continued into early August 2005, as NYMEX crude oil futures contracts surged past $65 as consumers kept up the demand for gasoline despite its high price. Crude oil futures peaked at a close of over $77 in July 2006, and in December 2006 at about $63. That is just about where they began the year 2006.
In September 2007, US crude (WTI) crossed $80. Multiple factors caused this high price. OPEC announced an output increase lower than expected. US stocks fell lower than experts predicted, changes in federal oil policies , and six pipelines were attacked by a leftist group in Mexico.
In October 2007 US light crude rose above $90 for the first time, due to a combination of tensions in eastern Turkey and the reducing strength of the US dollar.
On January 2, 2008, a single trade was made at $100, but the price did not stay above $100 until late February. Oil broke through $110 on March 12, 2008, $125 on May 9, 2008, $130 on May 21, 2008 , $135 on May 22, 2008, $140 on June 26, 2008 and $145 on July 3, 2008.
On July 11, 2008, oil prices rose to a new record of $147.27 following concern over recent Iranian missile tests.
However, oil prices declined by more than $20 over the next two weeks, settling around $125 a barrel on July 24, 2008, A strong contributor to this price decline was the drop in demand for oil in the US. Miles driven there in a month were down in March-May 2008 compared to 2007, with the 4% decline in May being the largest drop in history.
Oil further dropped down to its lowest price in 3 months, at around $112 a barrel, on August 11,2008, and on September 15, oil price fell below $100 for the first time in seven months.On October 11, oil fell as much as 8.89$, or 10.17%$ to 77.70 USD per barrel as global equities slide . Oil traded below $70 on October 16, 2008. On December 21, 2008, oil was trading at $33.87 a barrel, less than one fourth of the peak price reached four months earlier. Prices did not rebound once 2009 started. Instead, after initially climbing above $48, prices descended by mid-February to below $34, hurt by forecasts for further declines in world demand.
The price of oil, like the price of all commodities, is subject to major swings over time, particularly tied to the overall business cycle. When demand for a commodity like oil exceeds production capacity, the price will rise quite sharply because both demand and supply are fairly inelastic in the short run. Users of oil might be shocked by much higher prices, but they have commitments and habits that determine their energy use, and these take time to adjust. On the supply side, especially at the outer edge of existing production capacity, adding new capacity is time-consuming and expensive. Over time, however, both businesses and individuals figure out ways to cut back their oil consumption in response to high prices, and the high prices promote new investment in production and the arrival of new sources in the market, gradually restoring a supply-demand balance. The extraordinary spike in prices in mid-2008 represents to a large extent the consequences of a brief period where global oil demand outran supply. When supply exceeds demand, on the other hand, microeconomic theory says the price should collapse to the marginal cost of production of the most expensive source. As the price drops, the most expensive wells become uneconomical and are shut down, at least temporarily. Price equilibrium is reached somewhere near the production cost of the most expensive source needed to meet global demand. The swing from what the market will bear in the first days of shortage to the marginal cost of the last well in times of surplus can be huge. Most commodity prices (metals, grains, even manufactured commodities like NAND flash memory) are subject to similar large swings over time.
As global oil production begins to decline (after "peak oil"), the medium-term volatility of oil prices is likely to be higher than before, because the range of production costs among all sources supplying the market will much greater. Major oil fields exist where the cost of production is comfortably below US$10 per barrel, and these were adequate to supply all global demand for many years. A large portion of the world's supply still comes from such inexpensive sources. Future shortages and high prices, however, will spur the development of oil sources with production costs of $50, $70, even $100 per barrel, including deep water sites, tar sands, oil shale, and secondary recovery from depleted fields. In the language of microeconomic theory, the supply curve will be much steeper than in past years. Shifts in demand, either up or down, will cause relatively larger swings in market price.
Benchmark pricing
Oil is priced at various locations around the world via a mechanism called benchmark pricing which links local prices to publicly traded benchmarks such as NYMEX WTI crude oil and ICE Brent crude oil. Benchmark prices are also called price markers.
Market listings
Oil is marketed among other products in commodities markets. See above for details. Widely traded oil futures, and related natural gas futures, include:
- Petroleum
- Nymex Crude Future
- Dated Brent Spot
- WTI Cushing Spot
- Nymex Heating Oil Future
- Nymex RBOB 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.
Speculation
The surge in oil prices in the past several years has led some experts to argue that at least some of the rise is due to speculation in the futures markets. This has led to an investigation, which reached an interim conclusion that speculation was largely not responsible for the rise. Economist James K. Galbraith believes that much of the rise is due to the "Enron loophole" drafted in a rider by former Texas senator Phil Gramm, which allowed energy futures to avoid Commodity Futures Trading Commission oversight. Galbraith cites Masters, a hedge fund manager, who observes that index speculation tied to commodities by pension funds and other investment vehicles has risen from $13 billion in 2003 to $250 billion in 2008. Galbraith observes that with Goldman Sachs predicting a rise in the price to $200 and Gazprom $250, suppliers may react to the rise by restricting supply until they can sell their product at a higher price.
Futures 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. This announcement has received wide coverage in the financial press, with speculation about oil futures price manipulation.
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 was continuing to analyze commodity markets and intended to issue further findings later in the year.
Oil price and stock market
Even though stock market fluctiations are sometimes attributed to oil price changes, no significant short-term (daily or weekly) correlation between the two have been found if the data is taken for a sufficiently long period.
See also
External links
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