Today’s Crude Oil Market

The increasing demand for petroleum products has affected the refining sector, and this has affected the global crude oil market. Even as the capacity to refine crude continued to expand, utilization rates exceeded 90 percent in the United States over the period of 2000-2004. As the demand increased, so too did the demand for conversion capacity.

The reduction in spare refining capacity has affected the international crude oil market. There are many different types of crude oil. To name a few here: West Texas Intermediate, West Texas Sour, Arab Heavy, Bonny Light. There are many characteristics to any given crude, the two most common distinctions relate to its viscosity or how “light” or “heavy” a crude is, and the amount of impurities contained within the oil, sulfur being the most common. These characteristics indicate the amount of processing required to convert the crude oil into saleable petroleum products. Generally speaking, lighter crudes, which are also known as “sweet”, require less processing to produce a relatively more valuable group of petroleum products, such as gasoline, diesel, and jet fuel. Heavier crudes, also known as “sour” contain more sulfur and require more processing before the resulting petroleum products can be sold into the marketplace.

The market for refined petroleum products is very similar to the crude oil market in that there is widespread buying, selling, and trading of products in both the physical market (or spot market) and the futures market. And just as with crude oil, there are significant international flows of refined products. Trade in petroleum products reflects the international market’s efforts to match what is produced (the supply) with what consumers prefer (the demand). In the United States the majority of exports tend to involve products for which there is little or no domestic demand. Crude oil is the single largest input cost associated with the manufacturing of petroleum products. The rest of the other costs involved make up the other 50%.

Consequently, changes in crude oil prices have a significant effect on petroleum product prices. If crude oil prices rise, most likely gasoline prices will also rise. Changes in expectations about future crude oil prices can lead to changes in both current and future prices of gasoline and other petroleum products. Inventory of the products will either have to build up or be drawn down. However, prices for petroleum products can also change due to supply-and-demand factors unrelated to the crude oil market.

There exists a dynamic relationship between current prices and prices for petroleum products to be delivered in the future. Future markets can give valuable information to oil companies like Triple Diamond Energy Corporation about the market’s expectations about future supply and demand conditions in the physical market—conditions that will ultimately determine the price for oil.