Crude oil
What is crude oil?
Crude oil is a naturally occurring, unrefined petroleum product made up of hydrocarbon deposits and organic materials. As a fossil fuel, it serves as the raw material for producing gasoline, diesel, kerosene, asphalt, and petrochemicals. Crude oil is a nonrenewable resource, meaning it cannot be replenished naturally.
Typically extracted through drilling, crude oil is found alongside lighter natural gas above it and denser saline water below. Once extracted, crude oil undergoes refining, starting with distillation, where it is heated and separated into various components based on their boiling points. Its color and viscosity vary depending on its hydrocarbon composition, ranging from black to yellow. Often referred to as “black gold,” crude oil is a cornerstone of global energy and industrial processes.
types of crude oil
West Texas Intermediate (WTI)
Known as a sweet and light crude oil, WTI contains low sulfur levels (0.24%) and has a gravity of 39.6 degrees. It is primarily refined in the Gulf regions and the United States due to its proximity to oil reserves, making it a popular choice for producing gasoline and diesel.
Brent Blend
Extracted from fields in the North Sea, Brent Blend is another sweet crude oil with 0.37% sulfur and a gravity of 38.06 degrees. It is widely used for producing petroleum products like gasoline for vehicles and serves as a global pricing benchmark.
Dubai Crude
Produced in Dubai, this crude oil has a gravity of 31 degrees and a sulfur content of 2%. Its lighter density makes it suitable for various refining processes and regional applications.
Bonny Light Crude Oil (BLCO)
Produced in Nigeria's Niger Delta region, Bonny Light is a high-grade crude oil with low specific gravity and high API gravity. Its quality and location make it a valuable export product for the Nigerian economy.
Russian Export Blend (REBCO)
A standard for Russian crude, REBCO is classified as sour oil due to its high sulfur content. It is heavily exported to countries like Italy and the Netherlands and plays a significant role in Europe's energy supply.
crude oil: a diverse resource
Crude oil, a naturally occurring petroleum product, is classified by its source and physical characteristics, including sulfur content and density. It is described as “sweet” if it contains low sulfur levels and “sour” if it has higher sulfur content. Similarly, its density determines whether it is categorized as “light” or “heavy,” with light crude being less dense and easier to refine. These properties affect the oil’s value, refining process, and environmental impact.
Sweet crude is generally more desirable due to its lower sulfur levels, which simplify processing and improve end-product quality. Light crude, measured by American Petroleum Institute (API) Gravity, is more cost-effective to produce and refine, yielding higher proportions of valuable products like gasoline and jet fuel. In contrast, heavy crude, often called tar sands, requires additional refining to extract marketable products and has higher concentrations of impurities such as sulfur and metals.
Economic Value and Refining Costs
The economic value of crude oil depends on its ease of refining. Oils that require less processing, such as light, sweet crudes, command higher prices. For example, West Texas Intermediate (WTI) has a higher yield of desirable end products like gasoline during distillation, giving it a premium over heavier oils like Arabian Light, which produces more residual by-products requiring further processing. The distillation process separates crude oil into components based on their boiling points. Lighter products like liquid petroleum gas (LPG) and naphtha emerge at lower temperatures, while jet fuel and diesel appear at mid-range temperatures. Heavier products, such as residual fuel oil, require reprocessing to produce more valuable outputs.
Toxicity and Environmental Impact
Crude oil toxicity varies with its composition. Lighter oils are more toxic but spread quickly on water or surfaces, posing risks to humans, wildlife, and ecosystems. Heavier oils are less toxic but harder to clean up, as they can sink in water and adhere to surfaces. The Environmental Protection Agency classifies crude oil into four categories based on spill behavior and toxicity: Class A oils are light, volatile, and highly toxic, spreading rapidly and evaporating quickly. Class B oils are less toxic but waxy, becoming harder to remove when warm. Class C oils, including heavy crude, are slow-moving and can smother wildlife. Class D oils, such as tar sands, are non-fluid and comparatively non-toxic but challenging to clean.
Crude Oil Trading Dynamics
Crude oil markets are influenced by supply-demand perceptions, economic conditions, and geopolitical factors. Futures and options markets, dominated by professional traders and industry hedgers, provide opportunities for both short-term and long-term trading strategies. Retail traders gain influence during sharp market trends, often drawn by media coverage. The two main crude oil benchmarks are WTI and Brent. WTI, sourced from the U.S., is a light, sweet crude favored in local refineries, while Brent, extracted from the North Atlantic, serves as a global pricing indicator. Since 2010, WTI and Brent prices have diverged due to shifts in supply dynamics, with U.S. shale production increasing WTI output while Brent supplies have declined. Regulatory factors, such as U.S. laws restricting local oil exports, have exacerbated this division, though changes in legislation may narrow the gap in the future. WTI prices have historically fluctuated, peaking during the 1970s oil embargo and reaching a high of $157.73 per barrel in 2008 before settling in a trading range between $20 and $55 by 2017. The NYMEX WTI Light Sweet Crude Oil futures contract offers significant liquidity, trading over 10 million contracts per month. However, its high risk due to large contract sizes and price fluctuations attracts primarily professional speculators.