An introduction

To understand the oil & gas industry it’s necessary to focus first on petroleum markets with their dynamics.

The petroleum industry is composed by three separate but related sectors: crude oil and natural gas production, petroleum refining and product marketing.

Crude oil is the raw material that is refined into finished products, including gasoline, diesel and jet fuels, heating oil, lubricants and asphalt. It is traded globally and prices are established in a worlwide marketplace. This global market reacts to supply and demand and the expectations of buyers as to where prices might be going. This includes assessments of volatile factors such as economic conditions, natural disasters and geopolitical or military events, especially in major oil-producing regions such as the Middle East. The price is usually expressed in $US per barrel.

The price of petroleum generally refers to the spot price per barrel (159 liters) of either WTI (West Texas Intermediate)/light crude oil as traded on the New York Mercantile Exchange (NYMEX) or of Brent as traded on the Intercontinental Exchange (ICE).

Several factors have repercussions on prices of the petroleum. In fact the price of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. The American Petroleum Institute gravity, or API gravity, is a measure of how heavy or light a petroleum liquid is compared to water. If its API gravity is greater than 10, it is lighter and floats on water. If less than 10, it is heavier and sinks. Oil with an API gravity between 40 and 45 commands the highest prices. Above 45 degrees the molecular chains become shorter and less valuable to refineries.

The demand for oil is highly dependent on global macroeconomic conditions. The slightest incident or crisis send oil prices in the London and New York markets soaring or plummeting, thus exacerbating speculation and having an influence on prices. According to the Internatinal Energy Agency, high oil prices generally have a large negative impact on the global economic growth.

According to the BP Statistical Review of World Energy 2012, global oil consumption grew by a below-average 0.6 million barrels per day (b/d) in 2012 to reach 88 million b/d. OECD consumption declined by 1.2%, reaching the lowest level since 1995. Outside the OECD, consumption grew by 1.2 million b/d, or 2.8%. Despite strong oil prices, oil consumption growth was below average in producing regions of the Middle East and Africa due to regional unrest. China again recorded the largest increment to global consumption growth (+5.5%) although the growth rate was below the 10-year average.

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