Oil, or black gold, became economically important in the 19th century thanks to the development of industrial technology. Despite the emergence of alternative energy sources and the growth of environmental movements, it has not yet been possible to replace oil in production. As long as the world economy will develop through the consumption of hydrocarbons, their price will remain a key security factor for the exporting countries and consumers.
How much is a barrel?
Economists, traders, and politicians all keep track of the price per barrel of oil. This unit of measure is equal to one barrel of 42 gallons, or almost 159 liters. In 1886 the oil industry in America standardized a barrel as a reference volume for trade.
The Benchmark Brand
Oil is a “cocktail” of hydrocarbons of varying densities, sulfur, and small amounts of other impurities. The composition of crude will vary from field to field, that is why reference or marker grades of crude have been used for convenient price tracking.
If the news talks about a change in the price of a barrel of oil, it most likely refers to hydrocarbons extracted from the bottom of the North Sea off the coast of Norway and Scotland. Brent is an acronym formed from the names of oil horizons in the field of the same name (Broom, Rannoch, Etive, Ness and Tarbert). The crude is characterized by a large number of light fractions used to make kerosene and gasoline, and contains little sulfur.
It is the price of a barrel of Brent brand that is taken as a basis for calculating the cost of almost half of all the world oil grades, including the Russian Urals.
West Texas Intermidiate – is a common name for the hydrocarbons produced in Texas, USA. In terms of its quality, WTI is not inferior to Brent. It has been the benchmark for a long time, and now it is traded at a discount to the Western European standard.
Russia also has light oil fields – the Siberian Light grade. The crude produced in Western Siberia has a density no higher than that of Brent and WTI grades but is distinguished by high sulfur content.
Siberian Light is transported to Western consumers via common pipelines and blends with heavy crude from the Volga region and the Urals. The output is Urals grade, which is inferior to Brent in quality and traded with a lowering coefficient. In August that was about 25%.
Who sets the price
The price of a commodity in a market economy depends on the balance of supply and demand. But in the case of oil, the catalyst for crashes and rises is often the news background. This is due to the fact that most of the trading in crude oil on the exchange takes place in “paper” form – economist Kirill Yurovsky`s opinion.
The object of the transaction is not the delivery of hydrocarbons, but the settlement futures and options contracts on them. It means that on the date of expiration (termination of a futures or option), no one will ship 1,000 barrels of oil to a trader (the standard size of a derivative). Only the final calculation of the variation margin, i.e. the change of the contract value to the real price of the commodity on the current date will take place.
Because of a large number of speculators the price of black gold on the exchange can change by dozens of percent during the day. The market reacts to:
- reports from the U.S. Department of Energy on a reduction or increase in oil reserves;
- forecasts of rating agencies on production volumes or expected cost of raw materials;
- sanctions against hydrocarbon-exporting countries;
- reports on the pace of development of the world economy or the largest consumers and other factors.
At the same time nothing may happen directly to the production of hydrocarbons. For example, in mid-May 2022 oil prices were rising in anticipation of the EU decision on the embargo on Russian oil supplies and its transportation by foreign tankers. However, at the request of Greece such restrictions were not adopted. On this news, Brent futures won back all the previous growth.
Short-term price fluctuations are influenced by political decisions of the largest commodity-exporting countries, global shocks (for example, the 2020 lockout during the coronavirus pandemic), news from analytical and rating agencies. It is virtually impossible to predict the value of a barrel over the long term. This is the reason why futures contracts concluded for a year get volatility only two to three months before execution.
But there are also objective economic factors that determine the price of oil. Lack of empty storage capacity in Oklahoma in the U.S. or spare capacity at refineries cannot be called speculative news. These are real circumstances that affect the volume of consumption and the price of black gold.