Crude Oil Prices Definition

What Crude Oil Prices Measure: Crude oil prices measure the spot price of various barrels of oil, most commonly either the West Texas Intermediate or the Brent Blend. The OPEC basket price and the NMEX Futures price are also sometimes quoted.

West Texas Intermediate (WTI) crude oil is of very high quality, because it is light-weight and has low sulphur content. For these reasons, it is often referred to as “light, sweet” crude oil. These properties make it excellent for making gasoline, which is why it is the major benchmark of crude oil in the Americas. WTI is generally priced at about a $5-6 per barrel premium to the OPEC Basket price and about $1-2 per-barrel premium to Brent.

Brent Blend is a combination of crude oil from 15 different oil fields in the North Sea. It is less “light” and “sweet” than WTI, but still excellent for making gasoline. It is primarily refined in Northwest Europe, and is the major benchmark for other crude oils in Europe or Africa. For example, prices for other crude oils in these two continents are often priced as a differential to Brent, i.e., Brent minus $0.50. Brent blend is generally priced at about a $4 per barrel premium to the OPEC Basket price or about a $1-2 per barrel discount to WTI.

The OPEC Basket Price is an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi Arabia, Dubai, Venezuela, and Mexico. OPEC uses the price of this basket to monitor world oil market conditions. OPEC prices are lower because the oil from some of the countries have higher sulphur content, making them more “sour”, and therefore less useful for making gasoline. The NYMEX futures price for crude oil is reported in almost every major U.S. newspaper.

It is the value of a 1,000 barrels of oil, usually WTI at some agreed upon time in the future. In this way, the NYMEX gives a forecast of what oil traders think the WTI spot price will be in the future. However, the futures price usually follows the spot price pretty closely, since the oil traders can’t know about sudden disruptions to the oil supply, etc.

How Crude Oil Prices Affect the U.S. Economy: Higher crude oil prices directly affect the cost of gasoline, home heating oil, manufacturing and electric power generation. How much? According to the EIA, 96% of transportation relies on oil, 43% of industrial product, 21% of residential and commercial, and (only) 3% of electric power. However, if oil prices rise, then so does the price of natural gas, which is used to fuel 14% of electric power generation, 73% of residential and commercial, and 39% of industrial production. (Source: EIA, U.S. Primary Energy Consumption by Source and Sector, 2004)

For this reason, higher oil prices increase inflation, thereby increasing the cost of everything you buy. Concerns about inflation will depress the stock market, as happened in the summer of 2006.

How Crude Oil Prices Affects You: Crude oil prices most directly affect you in higher gasoline prices and higher home heating oil prices (primarily for those of you who live in the Northeast U.S.) Crude oil accounts for 55% of the price of gasoline, while distribution and taxes influence the remaining 45%.

Recent Crude Oil Price Trends: In January 2008, the price of WTI crude oil hit an all-time high of $99.62 per barrel. This is the opposite of last year, when it fell to nearly $50 per barrel in January 2007.(Source: EIA)

The U.S. average retail price for regular gasoline remained at or above $3 per gallon for nine consecutive weeks during the summer. This compares to four weeks in the summer of 2006, before it declined to an average of $2.26 per gallon over the last quarter of the year. (Source: EIA)

Many analysts explain the price shifts by citing high demand for gasoline in the summer months, and lower than expected demand for home heating oil, due to warmer winter weather. However, some analysts also blame the unknown effect of sudden shifts by hedge fund and futures traders.

Last year, OPEC cut its production targets for the first time since April 2004. OPEC, particularly Saudi Arabia, wants to keep oil prices high enough to generate a comfortable standard of living for their residents, but low enough to discourage further oil exploration and development of alternative fuels.This year, however, it is keeping targets the same to keep up with higher demand.

The Crude Oil Price Outlook: The EIA forecasts the price of a barrel of WTI crude to be around $85 per barrel through 2008. This is higher than its previous forecast of $70 a barrel, made in October. However, in March a barrel of WTI crude hit $110, thanks primarily to trading in the futures market.(Source: Will Record-High Oil Prices Continue?, EIA, Short-Term Forecast)