When crude oil is extracted from the ground, it is refined into useful petroleum products such as diesel fuel and gasoline. Due to the value of products based on crude oil, investing in crude oil is common.
What is Crude Oil?
Crude oil is a mixture of hydrocarbons that consists of the remains of plants and animals that lived in a marine environment millions of years ago. Over those millions of years, the remains were covered by layers of rock, sand, and silt. These remains were converted into crude oil due to the pressure and heat from these layers. Since it dates back millions of years, crude oil is known as “fossil fuel.”
Petroleum products are made from crude oil, coal, natural gas, or biomass. Examples of petroleum products include gasoline, jet fuel, waxes, asphalt, and lubricating oil.
Interestingly, one barrel of crude oil, which has a capacity of 42 gallons, produces about 45 gallons of petroleum products due to a refining phenomenon known as “refinery gain.”
Types of Crude Oil
Typically, oil investors are concerned with the quality of the oil they invest in and its location. This is because crude oil forms differently depending on the geographical makeup of the sites. Oil prices depend on geography, natural events, and regulatory influences governing production, supply, and demand.
The oil industry and regulators use crude oil density and sulfur content to classify it into several categories. Oil can be grouped by sulfur content as either sweet or sour, or by density as either heavy or light. Using these two groupings – and by creating a middle group – oil is classified into six categories by the industry and investors:
- Heavy/Sweet
- Heavy/Sour
- Medium/Sweet
- Medium/Sour
- Light/Sweet
- Light/Sour
Heavy oils are used in industrial products such as asphalt and plastics. Medium oils have sulfur content that falls between heavy and light oils. Light oils are generally used in diesel fuel, gasoline, and jet fuel because they require less processing. Sour oil has more sulfur and carbon than light oil and requires more refining; thus, it incurs higher costs.
The U.S. Energy Information Administration has created a table showing where most crude oil comes from and its types in those areas.
For investment purposes, the classification by geography, weight, and sulfur content is the most important as they significantly affect price. However, some investors may be interested in the EPA classifications based on toxicity levels and changes in state.
Effects of Factors on Crude Oil Prices
The West Texas Intermediate (WTI) crude oil type is one of the most traded types of crude oil, alongside North Sea Brent. Historically, Brent and WTI prices have closely tracked each other, despite differing production levels. However, global events can cause pricing issues. For instance, in 2011, prices between crude oils diverged due to several significant events affecting crude oil prices:
- The Arab Spring: Oil prices are dependent on events in the Middle East. The war in Libya hindered OPEC’s ability to maintain its oil supplies.
- Demand: Increased demand from China and other Eastern countries caused prices to rise.
- Transport disruptions: The U.S. experienced a slowdown in crude oil transport.
- Debt crisis: Europe was in the midst of a significant crisis dealing with countries carrying heavy debt.
- Releasing strategic petroleum: Members of the International Energy Agency released oil from their stocks to meet rising demand.
Note: Price differences can arise due to various reasons, such as where the oil is produced, transportation costs, political and economic conditions in the regions where oil is sold, and refining costs.
Effects
The international community
Specific international events can also impact crude oil prices. For example, in early 2022, Russia invaded Ukraine. The international responses to the unjust invasion included a ban
Source: https://www.thebalancemoney.com/the-basics-of-crude-oil-classification-1182570
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