Crude oil, also known as "black gold," refers to unprocessed natural oil directly extracted from oil wells. It is a combustible substance consisting of various hydrocarbons, typically a black-brown or dark green viscous liquid or semi-solid. Crude oil is often found alongside natural gas and has a relative density of less than 1. It is a complex mixture of multiple components. After refining, crude oil can be processed into various petroleum products such as gasoline, kerosene, diesel, and lubricating oils. Crude oil is a crucial energy source, and its products are essential in national defense, science, industry, agriculture, transportation, and daily life.
The petrochemical industry can be divided into three main sectors based on the relationship between raw materials and products: upstream, midstream, and downstream. The upstream sector refers to the exploration and production of crude oil and natural gas, often referred to as the exploration and production sector. The midstream sector involves the initial refining of crude oil into various petroleum products and basic petrochemical raw materials through processes like distillation, catalytic cracking, catalytic hydrogenation, and more. The downstream sector includes refineries, chemical plants, distribution, and sales of petroleum products. The downstream industry includes thousands of oil products and chemicals, such as gasoline, diesel, aviation fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, and fertilizers.
Global crude oil production is mainly concentrated in the Middle East, North America, and Europe/Asia regions. The leading crude oil producers are the United States, Saudi Arabia, Russia, and China. The major consumers are the United States, China, and Japan. According to BP’s 2016 World Energy Statistical Review, the world’s proven crude oil reserves amounted to 1,697.6 billion barrels, with an annual consumption of 34.7 billion barrels.
The factors influencing crude oil prices can be broadly divided into supply-demand relationships and non-supply-demand factors. The supply-demand relationship is the fundamental factor in determining oil prices. On the other hand, since crude oil has become a financial product through futures markets, its crucial strategic role also makes political factors, the U.S. dollar, and speculative activities important price determinants. The main influencing factors are summarized as follows:
The relative strength of crude oil supply and demand plays a fundamental role in the formation of oil prices. Crude oil production and inventory levels determine supply, while economic growth drives demand.
As a vital strategic resource, crude oil is inherently tied to politics. Major fluctuations in oil prices have often been linked to geopolitical events, such as the Middle East wars and U.S. military actions in Iraq.
International crude oil prices are typically quoted in U.S. dollars. When the dollar strengthens, oil prices tend to fall, while a weaker dollar usually results in higher oil prices.
Crude oil is a highly financialized commodity. Crude oil futures prices serve as the benchmark for global oil trade, and the flow of international capital can have a significant impact on oil prices.
The listing of crude oil futures facilitates a country’s pursuit of pricing power and provides oil industry chain enterprises with a risk-hedging tool against price fluctuations. It is also a crucial investment instrument for investors.
Capital naturally has a speculative demand. The crude oil futures market attracts substantial funds, providing the initial momentum for the development of the oil industry. Through the futures market, traders can hedge against the negative effects of international price fluctuations and also gain profits from price volatility.
Example: On June 29, the crude oil futures price was 335 yuan per barrel. An investor believed that the sharp increase in U.S. shale oil and Middle Eastern oil production would cause oil prices to fall. Therefore, they shorted 10 crude oil futures contracts. By August 24, when the price dropped to 250 yuan per barrel, the investor decided to buy and close the position, realizing a net profit of (335 yuan/barrel - 250 yuan/barrel) * 1000 barrels * 10 contracts = 850,000 yuan.
Hedging is a futures trading strategy aimed at mitigating the risk of spot price fluctuations. By buying or selling an equivalent amount of futures contracts alongside buying or selling the physical commodity, businesses can offset losses or gains in spot market transactions with futures market profits. This creates a hedge mechanism between the "spot" and "futures" markets, minimizing price risks. By hedging, companies can stabilize production costs or expected profits, thus enhancing their ability to withstand market price risks.
Example: On May 20, a refinery learned that the price of domestic medium-sulfur crude oil was 295 yuan per barrel. Fearing future price increases, they decided to hedge by purchasing 100 crude oil futures contracts on the Shanghai International Energy Exchange. With a margin ratio of 10%, the futures contract required approximately 3 million yuan in margin. The trading and profit/loss situation is shown in the table.
Unit Conversion: Barrels (bbl) and tons (t) are common units for measuring crude oil. Western countries like OPEC and the U.S. use barrels, while China and Russia typically use tons. The conversion is as follows: 1 ton is approximately equal to 7 barrels. For lighter crude oils, 1 ton equals around 7.2 to 7.3 barrels.
In the U.S. and Europe, gas stations typically use gallons, while Chinese gas stations use liters. Conversion: 1 barrel = 42 gallons; 1 gallon = 3.78543 liters. Thus, 1 barrel = 158.99 liters.
