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- CRB Fundamentals - 2008 Commodity Articles


Crude oil is petroleum that is acquired directly from the ground. Crude oil was formed millions of years ago from the remains of tiny aquatic plants and animals that lived in ancient seas. Ancient societies such as the Persians, 10th century Sumatrans, and pre-Columbian Indians believed that crude oil had medicinal benefits. Around 4,000 BC in Mesopotamia, bitumen, a tarry crude, was used as caulking for ships, as a setting for jewels and mosaics, and as an adhesive to secure weapon handles. The walls of Babylon and the famed pyramids were held together with bitumen, and Egyptians used it for embalming. During the 19th century in America, an oil find was often met with dismay. Pioneers who dug wells to find water or brine, were disappointed when they struck oil. It wasn't until 1854, with the invention of the kerosene lamp, that the first large-scale demand for petroleum emerged. Crude oil is a relatively abundant commodity. The world has produced approximately 650 billion barrels of oil, but another trillion barrels of proved reserves have yet to be extracted. Crude oil was the world's first trillion-dollar industry and accounts for the single largest product in world trade.

Futures and options on crude oil trade at the New York Mercantile Exchange (Nymex) and at the International Petroleum Exchange in London (IPE). The Nymex trades two main types of crude oil: light sweet crude oil and Brent crude oil. The light sweet futures contract calls for the delivery of 1,000 barrels of crude oil in Cushing, Oklahoma. Light sweet crude is preferred by refiners because of its low sulfur content and relatively high yield of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The Brent blend crude is based on a light, sweet North Sea crude oil. Brent blend crude production is approximately 500,000 barrels per day, and is shipped from Sullom Voe in the Shetland Islands.

Prices - NYMEX crude oil prices in January 2007 dropped to a 1-1/2 year low of $49.90 per barrel but then trended higher throughout the year and closed 2007 at $95.98 per barrel, +57% y/y. Crude oil prices continued their meteoric rise into 2008 and as of March 2008 crude oil prices had reached a record $111.80 per barrel. The major bullish factor propelling crude oil prices during 2007 was the continued demise of the dollar. As the dollar extended its decline to record lows, hedge funds and commodity funds began to purchase crude oil as an inflation hedge. Despite the steady climb in prices in 2007, demand for crude oil remained strong, especially from China (now the second biggest oil consuming nation in the world). Geo-political events continued to support crude oil prices as well with tensions in the Middle East and Iran's nuclear ambitions. Militant attacks on Nigerian crude oil facilities and Turkish military raids into northern Iraq against Kurdish separatists rounded out the list of geo-political events underpinning crude oil prices during 2007. OPEC in 2007 enjoyed the surge in crude oil prices and by October 2007 had ramped up production to a 28-year high of 31.26 million barrels per day. As crude oil prices continued to rise in 2007, supply/demand fundamentals clearly had become out of whack as crude oil inventories remained above their 5-year averages and gasoline inventories moved up to 15-year highs. In early 2008, crude oil prices were still seeing support from the weak dollar and from strong Chinese demand, but there was speculation that US and global demand for oil would fade through 2008 due to widespread forecasts for a U.S. recession.

Supply - World crude oil production in 2006 (latest data available) rose +0.2% yr/yr to 73.485 million barrels per day, which was a new record high. The world's largest oil producers are Russia (with 12.6% of world production in 2006), Saudi Arabia (12.5%), the United States (7.0%), Iran (5.5%), China (5.0%), and Mexico (4.5%). U.S. crude oil production in 2006 fell 0.8% yr/yr to 5.136 million barrels per day, which was the lowest level in over 30 years. Alaskan production in 2006 fell -14.2% yr/yr to 741,000 barrels per day, the lowest level since 1977 and only 35% of the peak level of 2.107 million barrels per day seen in 1988.

Demand - U.S. demand for crude oil in 2006 (latest data available) rose +0.1% yr/yr to 15.240 million barrels per day, but still below the 2004 record high of 15.475. Most of that demand went for U.S. refinery production into products such as gasoline fuel, diesel fuel, aviation fuel, heating oil, kerosene, asphalt, and lubricants.

Trade - The U.S. is highly dependent on imports of crude oil to meet its energy needs. U.S. imports in 2006 (latest data available) fell 0.3% yr/yr to 10.095 million barrels per day, down from last year's record high. U.S. imports of petroleum products in 2006 fell -2.0% to 3.517 million barrels per day, imports of distillate fuel oil rose +9.19% yr/yr to 359,000 barrels per day, and imports of residual fuel oil fell -35.1% yr/yr to 344,000 barrels per day.

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