What’s crude oil?
Crude oil is a naturally produced liquid petroleum product made up of hydrocarbon layers and other biological materials made from the leftovers of plants and animals that lived millions of years ago. These animals were covered by layers of sand, mud, and rock, heated and pressed, and finally turned into a type of fossil fuel that can be made into useful products like gasoline, diesel, liquid petroleum gases, and material for the petrochemical industry.
Crude oil is a nonrenewable resource, which means it can’t be naturally renewed at the rate we use it. Because of this, it is a limited resource.
Key takeaways
Crude oil is a raw natural resource that is taken from the ground and turned into gasoline, jet fuel, and other petroleum goods.
It is made up of layers of hydrocarbons and other organic materials made from the leftovers of plants and animals that lived millions of years ago.
Petroleum is a more broad term for crude oil, which is the raw oil that is taken out of the ground, and other goods made from processed crude oil.
Crude oil is a global product that is traded in markets all over the world, both as spot oil and through swaps contracts.
Many experts think that crude oil is the most important item in the world because it is the main way that energy is made right now.
Understanding Crude Oil
Crude oil is usually gotten by digging. It is often found with other resources, such as natural gas (which is lighter and floats above the crude oil) and salt water (which is heavier and falls below). After natural oil is taken out of the ground, it is refined and turned into things like gasoline, kerosene, and asphalt so that it can be sold to consumers.
Crude oil is one of the most important goods in the world, and how much it costs can affect the whole economy. When the price of oil goes up, gas prices at the pump go up, shipping costs go up, and companies have to pay more for their raw materials. Prices for crude oil are mostly based on the laws of supply and demand.
When there is too much supply and not enough demand, prices go down. When demand goes up and supply goes down, prices go up. Changes in what people think about supply and demand can be caused by global events or natural disasters that hit oil-producing countries.
Futures markets, spot markets, and exchange-traded funds (ETFs) are all ways that investors and traders can trade oil.
A Look at the Past
Even though solid fuels like coal have been used for hundreds of years, it wasn’t until the Industrial Revolution that crude oil was found and created, and it wasn’t until the 19th century that it was put to use in industry. The way we work changed when new tools were made, and they needed these things to work.
Today, the world economy depends a lot on fossil fuels like crude oil, and the demand for these resources often causes political unrest because only a few countries control the biggest reserves. Just like in any other business, supply, and demand have a big impact on crude oil costs and profits. The biggest oil makers in the world are the US, Saudi Arabia, and Russia.
In the late 19th and early 20th centuries, the U.S. was one of the world’s top oil producers. U.S. companies also invented the technology to turn oil into useful goods like gasoline.
During the middle and end of the 20th century, the U.S. oil output dropped by a lot, and the U.S. had to start buying oil from other countries. But in 2021, the amount of crude oil that was brought in through net imports was the second least since 1985.
The Organization of the Petroleum Exporting Countries (OPEC), which was formed in 1960 and is made up of the world’s largest crude oil and natural gas stocks by volume, was its main provider.
In the late 20th century, this meant that the OPEC countries had a lot of economic power over the quantity of oil and, by extension, its price.
At the beginning of the 21st century, new technology, especially hydro-fracturing (also called “fracking”), led to a second energy boom in the U.S., which made OPEC less important and influential.
People say that using a lot of fossil fuels is one of the main reasons for global warming, which has become a hot topic in the last few decades. Some of the risks of oil digging are oil spills and the acidity of the ocean, which hurt the environment.
Also in the 21st century, many companies have started making goods that use energy from sources other than fossil fuels. For example, electric cars, houses with solar panels, and towns driven by wind farms are just a few examples.
Oil is often called “black gold,” but its viscosity can change and its color can range from black to yellow, based on what kinds of hydrocarbons are in it. The first step in refining is distillation, which is when oil is boiled and split into its different parts.
Crude Oil vs. Petroleum
The name “petroleum” comes from the Latin words “petra,” which means “rock,” and “oleum,” which means “oil.” It is often used the same way as “crude oil.” Petroleum is a more broad term for crude oil, which is the raw, unprocessed oil that comes out of the ground, and other goods made from refined crude oil.
All of the things that a refinery makes from crude oil or natural gas are called petroleum goods. Some of these items are diesel, gasoline, fuel oil, and more.
Putting money in oil. There are two kinds of oil contracts that investors can buy: spot contracts and futures contracts. Oil can be a risky asset, a way to diversify a portfolio, or a way to protect against situations that are tied to oil.
Place Orders
The price of a spot contract shows how much oil is selling on the market right now. The price of a futures contract shows how much buyers are ready to pay for oil on a certain date in the future.
The futures price doesn’t mean that oil will cost that much on the market when that date comes. At the time of the deal, this is exactly the price that oil buyers are expecting. Many things affect how much oil will cost on that date.
Most contracts for buying and selling commodities on spot markets go into action right away. Money is exchanged, and the buyer takes delivery of the goods. When it comes to oil, there isn’t as much desire for instant delivery as there is for delivery in the future. This is due in part to the difficulties of moving oil.
Traders and investors usually use futures contracts instead of spot contracts because investors don’t plan to take delivery of commodities. However, investors have made mistakes that have led to unexpected deliveries.
Futures Contracts
A deal to buy or sell a certain number of barrels of oil at a certain price on a certain date is called an oil futures contract. When someone buys futures, they sign a contract with the seller and pay a margin that is a certain portion of the total value of the contract.
End users of oil buy oil futures to lock in a price. Investors buy oil futures as a bet on what the price will be in the future, and if they guess right, they make money. Most of the time, they will sell their futures positions or roll them over before they have to take delivery.
There are two big oil trades that people in the oil market keep a close eye on. West Texas Intermediate (WTI) crude, which is traded on the New York Mercantile Exchange (NYMEX), is used as a standard for oil futures in North America.
North Sea Brent Crude, which is traded on the Intercontinental Exchange (ICE), is the standard in Europe, Africa, and the Middle East.
Even though the two prices move in a similar way, WTI is more sensitive to economic changes in the United States, while Brent is more sensitive to changes in other countries.
There are many futures contracts open at the same time, and most buying is done in the front-month contract, which is the futures contract that is closest to the present. The front month is also called the busiest contract because of this.
Details about the oil industry
Because crude oil prices change all the time and are usually more volatile than stock or currency prices, it is important for buyers and traders to have good information sources that report on the many things that can affect oil prices. There is news about crude oil on a lot of websites, but only a few of them report on breaking news and current costs. The information in the next three is up-to-date.
How do you put your money into crude oil?
Crude oil can be a risky asset, a way to add variety to a portfolio, or a way to protect against linked assets. You can buy crude oil through futures contracts or spot contracts. The price of a spot contract shows how much oil is selling on the market right now. The price of a futures contract shows how much buyers are ready to pay for oil on a certain date in the future.
What can an investor learn from the spot and futures prices of crude oil?
The gap, or basis, between oil futures contracts and the spot (cash) market, can show what people think about oil supply and demand in the short run. When futures prices are higher than spot prices, this is called contango. It means that buyers are ready to pay more for oil that will be shipped at a later date, which is a sign of bullish hopes. When futures trade below the spot, which is called “backwardation,” it can be a sign that prices will go down.
How can I keep up with the crude oil business?
You can find crude oil costs and news about the market online, often for free. MarketWatch, for example, gives up-to-date prices, news stories, and comments. On the site’s main page, there is a link that shows the price of crude. The Reuters news service is another free site that has a section that shows the prices of various goods. CNBC.com also has a page that is all about oil news and recent events.
The Organization of the Petroleum Exporting Countries (OPEC) is made up of what countries?
According to OPEC’s rules, any country that exports a lot of oil and agrees with the group’s goals can become a member. OPEC started with five countries, but as of 2019, there are 11 more countries that are part of it. In order of how they joined, they are:
Iran (1960)
Iraq (1960)
Kuwait (1960)
Saudi Arabia (1960)
Venezuela (1960)
Qatar (1961)
Indonesia (1962)
Libya (1962)
Arab Emirates, United (1967)
Algeria (1969)
Nigeria (1971)
Ecuador (1973)
Gabon (1975)
Angola (2007)
Equatorial Guinea (2017)
Congo (2018)
On January 1, 2020, Ecuador stopped being a member of the group. Qatar left the group on January 1, 2019, and Indonesia stopped being a part on November 30, 2016. So, by 2022, the group will be made up of 13 states.
In conclusion
You can’t say enough about how important crude oil is. It is a major form of energy that can be used to make heat and power cars and machines of all kinds. It is also a part of many of the things we use every day, such as plastics, paints, and makeup.
Some people don’t like crude oil because they worry about the damage it does to the earth. Most people agree, though, that we can’t live without it right now and that if we stopped getting and processing crude oil, the world economy would stop.
