Description

Crude oil is petroleum that is acquired directly from the ground. Crude oil was formed millions of years ago from the remains of tiny aquatic plants and animals that lived in ancient seas. Ancient societies such as the Persians, 10th century Sumatrans, and pre-Columbian Indians believed that crude oil had medicinal benefits. Around 4,000 BC in Mesopotamia, bitumen, a tarry crude, was used as caulking for ships, as a setting for jewels and mosaics, and as an adhesive to secure weapon handles. The walls of Babylon and the famed pyramids were held together with bitumen, and Egyptians used it for embalming. During the 19th century in America, an oil find was often met with dismay. Pioneers, who dug wells to find water or brine, were disappointed when they struck oil. It wasn't until 1854, with the invention of the kerosene lamp, that the first large-scale demand for petroleum emerged. Crude oil is a relatively abundant commodity. The world has produced approximately 650 billion barrels of oil, but another trillion barrels of proved reserves have yet to be extracted. Crude oil was the world's first trillion-dollar industry and accounts for the single largest product in world trade.

Futures and options on crude oil trade at the CME Group and at the ICE Futures Europe exchange in London. The CME trades two main types of crude oil: light sweet crude oil and Brent crude oil. The light sweet futures contract calls for the delivery of 1,000 barrels of crude oil in Cushing, Oklahoma. Light sweet crude is preferred by refiners because of its low sulfur content and relatively high yield of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The Brent blend crude is based on a light, sweet North Sea crude oil. Brent blend crude production is approximately 500,000 barrels per day and is shipped from Sullom Voe in the Shetland Islands.

Prices - CME West-Texas Intermediate (WTI) crude oil prices (Barchart.com symbol CL) posted their low for 2021 in January at $47.18 a barrel. Crude prices ratcheted higher into Q3 on tight global supplies. Reduced crude output from OPEC+ (OPEC plus Russia) led to tighter global supplies after they unexpectedly announced in March that they would refrain from restarting 500,000 bpd of daily output in April. Crude also rose on signs the global economy was recovering from the pandemic, which led to a rebound in energy demand. In July, U.S. gasoline demand soared to a record 10.043 million bpd. In addition, the U.S. stock market trended higher throughout the year to all-time highs, which bolstered confidence in the economic outlook and in energy demand. Crude prices then fell back briefly into September on concern that worsening financial troubles in China's property market could threaten its economy and energy demand. Also, the spread of the delta Covid variant throughout the world in Q3 led to lockdowns and travel restrictions that curbed energy demand. However, crude prices rallied into October and posted a 7-year high of $85.41 a barrel as oil U.S. supplies tightened. Hurricane Ida shut down most of the U.S. Gulf Coast offshore oil production and limited the operation of many refineries along the Gulf Coast. U.S. crude inventories tumbled to a 3-year low in September at 413.96 million barrels. Crude prices then fell back over -$10 a barrel into November as the omicron Covid variant spread worldwide. Also, the dollar index rallied to a 1-year high as a surge in inflation bolstered the outlook for the Fed to begin raising interest rates. Crude prices rebounded into year-end on signs the omicron variant was less severe than other Covid variants. Crude oil finished 2021 up sharply by +55% yr/yr at $75.21 a barrel.

Supply - World crude oil supply in 2020 fell by -6.3% yr/yr to 91.719 million bpd. U.S. crude oil production in 2020 fell by -7.7% yr/yr to 11.303 million barrels per day. Alaskan oil production in 2020 fell by -3.0% yr/yr to 451,710 barrels per day and was far below the peak level of 2.017 million barrels per day seen in 1988.

Demand - U.S. demand for crude oil in 2020 fell by -14.1% yr/yr to 14.221 million barrels per day. Most of that demand was for U.S. refinery production of petroleum products such as gasoline fuel, diesel fuel, aviation fuel, heating oil, kerosene, asphalt, and lubricants.

Trade - The U.S. is still dependent on imports of crude oil to meet its energy needs, but imports in 2020 fell by -13.6% yr/yr to 5.875 million barrels per day, down sharply from the 2005 record high of 10.126 million barrels. U.S. exports of crude oil in 2020 rose by +5.7% yr/yr to 3.153 million barrels per day.

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