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Crude oil: Basic facts - Views on News from Equitymaster
 
 
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  • Sep 25, 2006

    Crude oil: Basic facts

    Crude oil is the engine that propels the world economy, thus economists and analysts track its movements to see the growth trend in economy and corporate sector. Crude oil has shown great volatility in the past with it scaling highs in early 1980's and thereafter cooling to lower levels in 1990. However recently, over the last few years, prices again shot-up, followed by the recent cooling down. In this backdrop, we analyze the major consumers and producers of crude oil and the change in demand pattern.

    Major consumers of the crude oil
    The below listed countries account for as much as 64% of the total demand of crude oil. USA is the biggest consumer of crude oil, with it accounting for almost a quarter of the total demand. Thus, the dynamics and state of the US economy has a major say on the consumption level of crude oil in the world. The major consumers apart from the US are Japan, China, Germany, India and South Korea. China factor has heavily influenced demand over the recent few years. China's share in the incremental demand for crude oil across the world was 24% in 2001, 57% in 2002, 36% in 2003, 33% in 2004 and 22% in 2005. Thus, Chinese thirst for oil has increased at a fair clip.

    With consumption levels improving, the spare capacity available for the production of crude oil has reduced over the past. Thus, increased demand and reduced spare capacity (leading to fear of shortages) lead to surge in the prices of the crude oil.

    Major consumers of crude oil...
    Country ( in MT) 1965 1975 1985 1995 2000 2001 2002 2003 2004 2005
    USA 548.9 765.9 749.3 807.7 897.6 896.1 897.4 912.3 948.8 944.6
    % of the world consumption 35.9% 28.6% 26.7% 24.8% 25.4% 25.2% 25.0% 25.0% 25.0% 24.6%
    China 11.0 68.3 89.8 160.2 223.6 227.9 247.4 271.7 318.9 327.3
    % of the world consumption 0.7% 2.6% 3.2% 4.9% 6.3% 6.4% 6.9% 7.4% 8.4% 8.5%
    Russian federation N/A N/A 244.5 146.1 123.5 122.3 123.5 124.7 128.5 130.0
    % of the world consumption     8.7% 4.5% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4%
    Japan 87.9 244.0 206.3 267.6 255.5 247.5 243.6 248.9 241.4 244.2
    % of the world consumption 5.7% 9.1% 7.4% 8.2% 7.2% 7.0% 6.8% 6.8% 6.4% 6.4%
    South Korea 1.3 14.2 26.1 94.8 103.2 103.1 104.7 105.6 104.9 105.5
    % of the world consumption 0.1% 0.5% 0.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.8% 2.7%
    India 12.6 23.3 43.3 75.2 106.1 107 111.3 113.1 120.2 115.7
    % of the world consumption 0.8% 0.9% 1.5% 2.3% 3.0% 3.0% 3.1% 3.1% 3.2% 3.0%
    Germany 86.3 142.6 126.3 135.1 129.8 131.6 127.4 125.1 124 121.5
    % of the world consumption 5.6% 5.3% 4.5% 4.2% 3.7% 3.7% 3.5% 3.4% 3.3% 3.2%
    Italy 52.3 94.5 84.4 95.5 93.5 92.8 92.9 92.1 89.7 86.3
    % of the world consumption 3.4% 3.5% 3.0% 2.9% 2.6% 2.6% 2.6% 2.5% 2.4% 2.2%
    Saudi Arabia 19.6 18.4 46.8 58.6 71.6 71.9 72.7 77.7 83.7 87.2
    % of the world consumption 1.3% 0.7% 1.7% 1.8% 2.0% 2.0% 2.0% 2.1% 2.2% 2.3%
    France 53.9 110.4 84.3 89.0 94.9 95.5 92.9 93.1 94 93.1
    % of the world consumption 3.5% 4.1% 3.0% 2.7% 2.7% 2.7% 2.6% 2.5% 2.5% 2.4%
    Canada 53.8 81.1 71.2 79.8 88.1 90.5 92.2 95.9 100.6 100.1
    % of the world consumption 3.5% 3.0% 2.5% 2.5% 2.5% 2.5% 2.6% 2.6% 2.6% 2.6%
    Brazil 14.9 44.4 51.7 69.2 85.8 87.5 85.5 82 81.9 83.6
    % of the world consumption 1.0% 1.7% 1.8% 2.1% 2.4% 2.5% 2.4% 2.2% 2.2% 2.2%
    Total world 1529.5 2677.4 2801.2 3252.4 3537.2 3554.9 3589.0 3655.6 3798.6 3836.8
    Source: BP statistical outlook 2006

    On the products front, the demand for light and middle distillates constitutes major portion of the total demand in the world. The table below gives the distillate wise demand for the petroleum products in the world.

    Distillates wise demand for the petroleum products...
    Particulars
    ( Th. Barrels per day)
    1965 1975 1985 1995 2000 2001 2002 2003 2004 2005
    Light distillates 8,585 14,188 15,712 21,236 23,400 23,588 24,192 24,536 25,178 25,319
    % of total 30.9% 29.6% 31.0% 30.6% 30.9% 30.9% 31.3% 31.2% 30.9% 30.7%
    Middle distillates 7,420 13,991 16,623 23,682 26,593 27,130 27,153 27,804 28,966 29,584
    % of total 26.7% 29.2% 32.8% 34.1% 35.1% 35.5% 35.1% 35.3% 35.6% 35.9%
    Fuel oil 7,362 12,704 9,123 11,248 10,381 10,014 9,696 9,807 9,956 10,150
    % of total 26.5% 26.5% 18.0% 16.2% 13.7% 13.1% 12.5% 12.5% 12.2% 12.3%
    Others 4,453 7,013 9,193 13,339 15,405 15,648 16,239 16,508 17,344 17,406
    % of total 16.0% 14.6% 18.2% 19.2% 20.3% 20.5% 21.0% 21.0% 21.3% 21.1%
    Total 27,820 47,896 50,651 69,506 75,779 76,379 77,280 78,655 81444 82459
    Source: BP statistical outlook 2006

    The light and middle distillates account for more than two-third of the total demand for the petroleum products across the globe. In our previous articles, we had mentioned the fact that refining industry was plagued with surplus capacity in 1980 and 1990, thus no new big capacities were added over the last two decades. Demand for light and middle distillates has witnessed strong growth in recent years. With recent shortages of the refining capacity along with low number of complex refineries (refineries that have the ability to produce higher proportion of light and middle distillates), crude prices were more under pressure, as production of light and middle distillates was constrained by lack of complex refineries. This led to more crude being utilised for conversion into light and middle distillates. The demand for light distillate in china has grown at a CAGR of 6.6% (over the last 5 years), while the demand for middle distillates has increased by CAGR of 8.8% over the same horizon. Thus, increased demand for these products coupled with shortage of complex refineries propelled crude, product prices and GRMs (gross refining margins).

    Supply side of the story:
    Deflated crude oil prices in the past lead to lower investments in the upstream segment of the oil value chain. This led to lower surplus capacity to handle sudden increase in demand, thus resulting into demand-supply mismatch, thereby fuelling the increase in prices. Middle East accounts for a major portion of the total crude oil reserves in the world. Increased geo-political instability in the Middle East coupled with lower surplus capacity also lead to fear of supply shortage.

    Production of the crude over the past...
    Particulars ( in MT) 1965 1975 1985 1995 2000 2001 2002 2003 2004 2005
    OPEC 721 1,347 811 1,338 1,520 1,476 1,388 1,481 1,591 1,626
    % of total 46% 49% 29% 41% 42% 41% 39% 40% 41% 42%
    Non-OPEC 602 896 1,385 1,584 1,700 1,694 1,718 1,711 1,716 1,692
    % of total 38% 33% 50% 48% 47% 47% 48% 46% 44% 43%
    Former Soviet Union 243 491 597 358 393 425 466 514 559 577
    % of total 16% 18% 21% 11% 11% 12% 13% 14% 14% 15%
    Total production 1,566 2,734 2,792 3,281 3,614 3,594 3,572 3,706 3,865 3,895
    Source: BP Statistical outlook 2006

    OPEC, a group of major oil producing countries, accounted for 42% of the total crude oil produced in 2005, thus the group has a greater bargaining power and a major say in the determination of the international crude oil prices.

    What to expect?
    Crude oil prices have climbed steeply from the lows of US$ 18 per barrel in 1999 to US$ 78 per barrel. However, the prices have softened recently. Taking a call on the crude oil prices becomes a difficult task due to various conflicting political, geographical and economic factors affecting them. However, the recent historical high refining margin has led to declaration of plans of bringing in new capacities (with secondary processing capability). This will lead to lower amount of crude required for production of middle and light distillates. Also, the high crude oil prices, has led to more investment in the upstream oil sector. Thus the supply side is likely to improve in the future. However, predicting the demand side is a difficult task as the crude demand is contingent upon the economic development of its major consumers. Thus the state of US economy and Chinese economy will have an important bearing on the demand side. However, much also depends on the production levels of OPEC. Recently, after the fall in crude oil prices, the OPEC members are contemplating decrease in production levels to keep prices above US$ 60 per barrel. Thus, the economics of demand and supply gets distorted owing to such interventions, thereby affecting the price forecasting capabilities. Therefore the next time some high profile agency tries to forecast crude prices, we should indeed take it with a pinch of salt.

     

     

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