Monday, June 23, 2008

Petroleum: Basic and Pricing

An Overview

The petroleum industry is involved in the global processes of exploration, extraction, refining, transporting (often with oil tankers and pipelines), and marketing petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. The industry is usually divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category.

Petroleum is vital to many industries, and is of importance to the maintenance of industrialized civilization itself, and thus is critical concern to many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, up to a high of 53% for the Middle East. Other geographic regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North America (40%). The world at large consumes 30 billion barrels (4.8 km³) of oil per year, and the top oil consumers largely consist of developed nations. In fact, 24% of the oil consumed in 2004 went to the United States alone.[16] The production, distribution, refining, and retailing of petroleum taken as a whole represent the single largest industry in terms of dollar value on earth.

What Do You Get From A Barrel Of Crude Oil?

Since a barrel of crude oil will be processed into various outputs, will it means that current surge in gasoline (20% of crude output) and diesel (10% of crude output) due to higher demand in gasoline and diesel segments will result in similar surge in other by-products like LPG, heavy Fuel Oil (residual), etc?

Major Fuel Consumers

Looking at the top 15 fuel consumers, and top 15 net importers of fuel, the and innate knowledge of the potential for higher fuel consumption by emerging economies such as India and China, one could conclude that the fuel market is tight; hence a fertile ground for speculative activities in the market.

Total Fuel Consumption in 2006 and Net Import in 2006
Price Movement In Short To Medium Term

With the tight supply in oil market, despite voice to warn the bubble in oil market is ripe for correction, the ascending support line for Oil price remain slightly above USD64 at year end, which justify the notion that low oil price is a bygone era. As to what is the justifiable ceiling price less speculative premium is open to debate, and near impossible to pin ceiling price based on fundamental when there are so much going on in the market for Crude Oil.

OPEC No Longer a Synchronized Orchestra

Recently attempt by Saudi Arabia to increase production is not well-responded within the organization, unlike during the early 70s (during Arab-Israel war). Further new players

No Major Oilfield Discovered

President Bush has lifted the ban on offshore oil drilling which give rise to potential new oilfield discovery but too early to tell how this will impact the global supply of fuel. And with the expected change of administration, it is a question mark on how the incoming administration views on the latest policy that might invite criticism from the environmental lobbyists.


The oil price is unlikely to return the era of USD20 per barrel, anytime soon, if ever. However the recent spike in crude oil price is suspected to be unsustainable but what is the right ceiling price is anyone’s guess.

No comments: