Understanding Oil Prices
A Guide to What Drives the Price of Oil in Today's Markets
Wiley Finance Series
2. Edition December 2011
200 Pages, Hardcover
Professional Book
Oil prices have seen massive fluctuation over the past 10 years, with price per barrel growing from $9 to $140. More recently, we have seen fluctuation from $140 to $37/barrel, and back up to $120 - all in a matter of months. But why? It is still a popular belief that OPEC can affect the price of oil by regulating the volume of production and using this key raw material for their political aims, but the reality is quite different. In the last decade, despite a constant potential surplus of crude in the markets, we have seen the prices fluctuating dramatically with no apparent logic.
Starting from the Chernobyl accident and the Clean Air Act implementation in the US, structural changes within the oil industry have modified the dynamics of oil prices. The existing technological refining system is no longer adequate to transform, with the necessary continuity, the crude oils into the high-quality finished products demanded by the market. Furthermore, from the beginning of the year 2000, the oil futures market detached itself almost completely from its original nature (the barrel of oil), becoming a purely financial market, but still able to heavily affect the real oil prices. More sophisticated models are needed to understand this new scenario.
This book thoroughly demystifies the oil market, showing readers what really moves the price of oil today. It provides a comprehensive analysis of the industry fundamentals and the role of financial speculation, illustrating the complexity of the relationship of three different markets that regulate the oil sector: the crude oil market (raw material), the finished products market (gasoline, diesel, jet fuel, fuel oil, chemical feedstocks, lubricants), and the financial market (futures). It will provide an excellent grounding in the topic for anyone involved or interested in the oil markets, including financial analysts, traders, investors and energy market participants.
Preface xv
Quick Reference Guide xix
List of Figures xxiii
List of Tables xxvii
List of Boxes xxix
1 TheWorld Crude Oil Paradoxes 1
2 The Market Events from 2008 to 2011 7
World Energy Policy 8
The Financial Crisis and the Oil Market 10
Fundamentals or Financial Speculation? 17
Demand/Supply of Gasoline and Gasoil 21
WTI - Brent Differential 24
3 Evolution of the Price of Crude Oil from the 1960s up to 1999 29
1960-1980: The Oil Monopoly and the Two Crises in the 1970s 30
The 1980s: The Gradual Disappearance of OPEC 33
The Price War 35
1985-2000: From the Introduction of Brent as an International Benchmark to the Clean Air Act 37
The Suicide of OPEC 40
The Start of the Free Market 41
The Consequences of the Environmental Turnaround 44
4 Changes in the Market for Automotive Fuels 45
Evolution of Environmental Demand 45
Gasoline and its Components 50
Reforming 51
Cracking 52
Alkylation 53
Isomerization 53
Refiners Walk the Tightrope 53
The Fiscal Policy of the Industrialized Countries Regarding Fuels 55
5 World Oil Flow 63
Transformations in the Downstream 66
World Supply Structure 70
6 The Classical Model of the International Oil Market 73
7 The Short-term Model of the International Oil Market 81
8 The Brent Market 89
The Sale and Purchase Contract 90
The Forward Market for Brent (15 day Brent Contract) 94
The IPE Brent Market 100
The Divorce Between Oil Price and Oil 102
9 Principal Uses of the Forward and Futures Markets 105
Tax Spinning 105
Benchmarking 105
Hedging the Price Risks 106
Speculations on Operational Flexibilities at Loading 114
Market Structure: Contango and Backwardation 117
Procedures at the Loading Terminals 119
10 Problems of the Brent Forward Market 123
11 The European Refinery Crisis 131
12 Conclusions:We are Ourselves OPEC 155
Bibliography 163
Index 165
