Black Gold As The World Economy Indicator

Crude oil as well as the currency and the gold is one of the major indicators of almost all processes in the world economic system. The economic and political events stand for any volatility of oil quotations. However, due to the specification of oil deals and oil consumers there is always some kind of time lag, which makes the oil deals much more delicate investment instrument.

Crude oil blends

Brent (Brent Crude) – it is a standard grade of oil, produced in the North Sea. The grade name comes from minefield of the same name in the North Sea, opened in 1970. Actually, the crude oil blends can be called Brent, Oseberg and Forties between the coasts of Norway and Scotland. Brent is one of the most oil brands, which are being sold on the main world oil bourses. The Brent oil price have been the basis for priceforming since the 1971 for about 40% of oil grades all over the world, particularly, for Russian oil Urals. That is why this grade is called «benchmark». The price of oil used to be lower by 1 dollar/bl than the WTI price and higher by 1 dollar/bl than so-called «OPEC Reference Basket of crudes». However, this parity rate was changed in 2007 and the Brent oil is quoted with the WTI premium. At present time there is being discussed the justification of further use of the Brent oil brand as a basis for price setting at the world market. This is primary due to the weakening crude production in the North Sea, which leads to the fall of liquidity and the confusions during the price setting both for the crude oil blends and other oil brands.

Urals – it's a sour crude oil grade (sulfur content about 1.3%), which represents a crude oil blend, produced in Khanty-Mansiisk autonomous district and Tatarstan. Main producers of Urals oil are the following companies: «Rusneft», «Lukoil», «Surgutneftegaz», «Gazpromneft», «TNK-VR» and «Tatneft». The Russian oil price is determined by discounting of prices for Brent, as Russian oil is believed to be less qualified due to high sulfur content and hard cyclic carbohydrates. Recent time in Russia there were taken actions to raise the quality level of Urals oil by excluding the sour tartar oil (new distillation capacities to make gasoline from a local oil in order not to run it in the pipeline are going to be built in Tatarstan Republic.)

West Siberian oil has acceptable quality. Abroad it is known as Siberian Light brand. In Russia futures for Urals grade oil is being traded in FORTS market at the RTS stock exchange.

WTI (West Texas Intermediate) – it's an oil brand, which is produced in Texas (USA), the consistence is 40° API, sulfur content - 0,4-0,5 %, mostly used for gasoline manufacturing and that is why this oil grade is in strong demand, especially in the USA and China.

The crude oil market participants

Petroleum producers

Mostly the crude oil reaches the market from oil-extracting companies, which can be both small companies and huge corporations. It is reasonable that company's influence on the market depends on the volume of delivered oil. Consequently, other market participants pay a lot of attention to the gold producers’ activity.

Industry

To this can be referred industrial companies of all economic sectors and oil refining and processing companies, often it can be petroleum-refining firms themselves. This scheme is called vertically-integrated structure. Similar companies produce crude oil, reproduce it to an end product (gasoline, fuel etc.), but distribute it in their own retail chain.

Commodity and crude oil markets

In some countries at the most huge markets there are separate sectors, which are busy with trading, particularly, with the crude oil.

Investors

Investors in the market have different interests, which lead to the deposits in different forms to the instruments, connected with the crude oil. Normally, the most popular instrument among the investors of gold market is the futures.

OPEC

OPEC - Organization of Petroleum-Exporting Countries is international intergovernmental organization, launched by petroleum-refining powers in order to stabilize the oil prices. The members of this organization are the countries, whose economy depends on the profit from crude oil exports. OPEC as an instant organization was established at the conference in Baghdad on September 10-14, 1960. Primarily the following countries like Iran, Iraq, Kuwait, Saudi Arabia, Venezuela (the initiator of launching) entered the organization. These five countries, established the organization later were joined by more than 9 countries: Qatar (1961), Indonesia (1962-2008, November 1, 2008 left the OPEC), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973-1992, 2007), Gabon (1975-1994), and Angola (2007).

At the present time the OPEC includes 12 members, taking into account changes in the content in 2007: a new member of organization Angola and returning back Ecuador. In 2008 Russia announced about its readiness to become an instant observer in the cartel.

Crude oil trading

Produced oil in the world is far non-uniform in quality and consequently in price. The prices depend on the consistence and different paraffin additives, mixed in the oil blends. The standard for the prices serves the «Brent» oil grade, which is similar in composition to one that is being extracted in the North Sea, and the delivery contracts are being concluded at the London raw exchange market. The price for this grade is often set up by Mass Media.

Mostly, this price is a contract value for «brent» oil in the next month. When signing such contract- futures, the buyer obliges to pay and accept delivered product, and the seller - to deliver it to the place required.

Futures contracts are being concluded at appropriate stocks and paid away daily, according to the current market price. The minimal contract volume is 1000 barrels.

The main trading platforms of oil deals are the leading trade stock exchanges as: NYMEX, CME, РТС, LOE.

Oil Value

Oil was news maker of the last year in along with financial crisis. Reached the maximum of 147,26 US dollars for barrel on June, 11 2008, it lost 70 % of its price for a half of the year. Analytics supposed that the main reason of falling is overheat of the market by speculative capital. Looking from the fundamental point of view 100 US Dollars for barrel was acceptable but 140 US Dollars for barrel oil could not cost.

Finally, to the end of 2008 oil stabilized in diapason 40-50 US Dollars for barrel, and to the spring of this year it fell down to 38-42 US Dollars for barrel. Meanwhile, it came untied from the dynamic of American currency, that had been significant for it in first half-year. It is difficult to say if oil market groped the bottom. If a half of a year ago it was overbought then now it is oversold. That time the fair price was 101 US Dollars and now with a glance of the situation in the world economy new fair price is 70-90 US Dollars for barrel. Though hope of oil quotations reach those level in 2009 are groundless.

Just those fundamental factors played one of the main parts in oil quotations’ fall in 2008. Financial crisis entailed serious problems in real sector of the economy. Fuel demand began to decrease. At the same time when oil quotations rose in the first half-year of 2008, this rise was not corroborated by the oil demand.

In summer the biggest world agencies and investment companies predicted that oil price would never go down 100 US Dollars for barrel. Moreover, there was a forecast that oil would go up to 150-200 US Dollars for barrel. Such predictions are not casual if the fact that the biggest investment companies had their own positions on the oil market and recommendations’ rise was on their behalf, is taken into consideration.

Participation of the major funds and investment companies in race at oil market became one of the reasons of such fast price fall. However, at that time financial crisis took the world and nobody cared about the fraud on the primary market. Broken out liquidity crisis forced to sell all the assets including primary contracts. Weak macroeconomic data and waiting for reduction of demand for fuel all over the world aggravated the situation.

By the way no one country-importer of oil in 2009 complained about the delivery of primary product shortage. The OPEC (Organization of Petroleum-Exporting Countries) had been producing oil over prescribed quota during this period. The cartel’s representatives repeated constantly that market is well-supplied and it is not their fault that the price for petroleum is high.

Oil market crash was expected. But fall down to 37 US Dollars for barrel was unexpected. Producers and users of oil supposed that 60-70 US Dollars for barrel is acceptable market price. Price 90-100 US Dollars for barrel seemed high, but though acceptable. Producers could not imagine price 37 US Dollars for barrel even in the most frightening nightmares, and users - in the sweetest dreams.

Economy of the USA and US Dollar rate's influence on the petroleum price

The regular publications of crude oil reserves in the USA and China as the main petroleum products consumers have considerable influence on the current short-term oil price. Oil reserves reduction in the USA and China shows the going these countries’ industry out of recession and general recover of economies of these counties and the rest of the world. Reports of the USA Electronic Industry Association (EIA) do not make oil producers happy announcing about considerable petroleum reserves.

One more factor that influences the increase of oil quotations is dependence of the world commodities market from the situations on the currency exchange markets. Petroleum as gold will go up against the background of US Dollar’s descent against Euro and other major world currencies.

Oil extraction volume
During the last ten years oil demand has been rising with the average annual speed 1, 6 %. It is preferable to talk about oil extraction level decrease as little as possible. Though there is a point to think about. During the last years oil extraction has been decreasing in the USA, Mexico, Norway and Great Britain. These countries have passed the peak of the oil extraction and tendency of decrease will intensify every year. Meanwhile, 17 % of world oil extraction falls within them (by information of the BP World Energy Outlook 2008). The most dangerous situation is in Norway and Mexico where in 2007 oil extraction decreased by 7, 7 % and 5.5 %. In 2009 Russia will join these countries, which global oil production part is 12.6%. Now geological survey is frozen in Eastern Siberia. Development profitability and future production activity of new oil extraction centers is close to zero at the moment. This situation will exist till the price of barrel becomes 60-70 US dollars.

So next year five major oil production companies will decrease primary materials delivery. If oil extraction of Russia, the USA, Mexico, Norway and Great Britain decreases by 1 % and the OPEC reduces as promised by 12 % (or even 10 %), then global oil production level will reduce by 4,5-5 % (on conditions that other countries keep oil extraction at the same level).

This oil production decrease can be compared with so-called crisis “Oil Embargo” in 1973 when some Arabic countries - members of the OPEC decided not to supply oil to the countries which support Israel in “October War”. Remind you that global oil production decreased by 4-5 % and price for barrel rose from 3 US Dollars to 9 US Dollars. However difference in reduction of oil production that time and now is dictated by completely different factors. Oil consumption in 1973 was rising, now it is decreasing. Reduction in 1973 was provoked by military and political crisis, now it is provoked by absolutely logical economical reasons. That is why waiting of oil price increase is pointless. It is pointless to remember “Oil Embargo” in 1978 when because of “Persian news” oil production was diminished though unlike 1973 that decrease fall on industrial boom in the USA. Then rising of oil price went up from 40 USD to 110 USD.
Speed of supply fall in present crisis conditions can be higher than speed of demand fall which can resist because of developing markets. Moreover, the EIA has already announced that in 2011 the world risks to face energetic catastrophe because of insufficient oil supply. Logic of the EIA is simple. For oil production increase it is necessary to invest 360 billion Dollars. In crisis and low oil prices conditions companies will reduce investments which can lead to the abrupt fall of oil production level. Oil demand will be reinstated but not the extraction level because companies would not invest in appropriate time. This will lead to excess of the demand over the supply.

Moreover it should be taken into consideration that the oil price is not objective in relation to the prime cost of the extraction. Cheap oil era passed and oil production cost is rising year to year. Average cost of production can be from 4 to 7 US Dollars for barrel in traditional regions of extraction, for instance, in Russia. Cost of bathypelagic oil production can be from 20-40 US Dollars per barrel. Add transportation cost and other extra costs to the prime value and we receive that the price which is acceptable for producers (and price which allows to intensify production in future) is 60 US Dollars for barrel. Low prices prejudice new projects of oil production in difficult-to-access regions.

Oil future

In 2009 oil prices can return to rising tendency which was in 1998. Returning to rising tendency means quotations moving in the range 40-80 US Dollars per barrel.

In the first half of the year market will not get rid of numerous speculators’ influence, that is why it can be expected that oil prices can stay in diapason 40-50 US dollars per barrel. Though temporary price fall to 20-25 US dollars for barrel is probable. At the second half of 2009 market will begin to feel oil deliver decrease. World economy can start to adapt after the autumn shock of 2008. Recognition of the fact that many assets were resold in panic will come. Oil supply reduce will be felt more powerful in the second part of the year. It can move oil prices to higher diapason 50-70 US dollars. According to these facts forecast of the average oil price in 2009 will be approximately 60 US Dollars. Target oil price by the end of year is 65 US dollars per barrel. However, it is just forecasts, reality can be another. It is unknown how successful “Obama’s plan” will be and how stable US Dollar will be and if new round of recession overwhelm the world economy. However parliaments of many oil-producing countries are reconsidering the budget and budgetary oil price corrected to pessimistic forecast.