In The News

How crude: reasons for oil prices as hard to pin down as a greased pig

We don’t need traders and investors to tell us that oil is one of the world’s most valued commodities. But sometimes pinning down oil prices can be about like trying to catch a greased pig.

Buyers and sellers, themselves, can be confused by the bewildering varieties and grades of crude oil, so they’ve found it easier to use a reference point, known as a benchmark, of crude oils.

The varieties and qualities of oil depend on their viscosity (think heaviness), measured by API gravity, which in turn is determined by how heavy or light liquid petroleum is compared with water. The higher viscous crudes are called “heavy” and those with a lower API number are described as “light.”

Varieties of crude also are measured by the amount of sulfur they contain. Those with higher sulfur content are called “sour” and ones with less sulfur are considered “sweet.”

West Texas Intermediate, known as WTI, is a major benchmark for oil traders and is the underlying commodity of New York Mercantile Exchange (NYMEX) oil futures contracts. (In a futures contract, the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specific location, according to BBC News.) WTI is a light and sweet crude.

Another major benchmark for oil varieties is Brent, or really Brent Blend, a combination of crude oil from 15 different oil fields in the North Sea. Brent crude is only slightly heaver than WTI and still considered “light.”

Another benchmark is the NYMEX futures price for crude, which represents on a per-barrel basis the market value of a futures contract to either buy or sell 1,000 barrels of WTI or some other light, sweet crude oil at a specified time.

Most of the time the NYMEX futures price is close to the WTI spot price for crude.

Then you have the OPEC (Organization of the Petroleum Exporting Countries) Basket Price, which is based on the average of crude oils produced by Middle Eastern, African and South American OPEC countries (such as Algeria’s Sharan Blend), and including Mexico’s Isthmus, a non-OPEC crude.

So why does the price of crude and hence the price of diesel and gasoline go up and down?

It’s the old supply-and-demand factor, and sometimes the speculation and expectation of what prices will be related to supplies (how much oil is in stock based on current supply and events that might limit supplies such as unrest or war in an oil-producing country) and what demand likely will be.

When the economy worldwide began to go bad, and the housing market crumbled along with the lending community, people began to drive less and less and demand for crude went down. New construction, both homes and businesses, slowed here in the U.S. and freight slowed right along with it.

Worldwide people are using less oil and diesel because of the weakening economy. So there’s more oil in stock, now, hence the lower prices, and oil economy experts expect diesel prices to stay around the same through May or June.

Dorothy Cox of The Trucker staff may be reached to comment on this article at [email protected] .