It is true to say that the cost of crude oil is the major input cost for refiners. However, the relationship between such a cost and the final price for a petroleum product produced from that crude, such as petrol or diesel, is not as direct as one would think.
There are, for instance, additional petroleum product markers which give a guide to prices. That is, prices are not just a function of cost-push, but are also strongly influenced by demand-pull.
For example, USA environmental requirements for gasoline (petrol) have at times pushed up the prices in the USA by significantly more than the movements in crude prices. This is the market working as refiners who see these prices work hard to increase production to capture some of these high prices before they dissipate under competitive pressure – both from within the USA and from the resulting massive influx of product cargoes from other producing centers in the world.
There are also a number of other variables which affect the price of products such as petrol. In addition the perception of the purchasers and sellers in the market as to the price risk over time can also add or subtract premiums to the product marker price.
Sunday, April 13, 2008
Pricing of Physical Crude Oil Trades
Generally this is based on a formula approach where a marker crude is used as the base and then a quality differential (premium/discount) as well as a demand/supply (premium/discount) is added depending on the crude being purchased.
Thus in times of tight supply this premium will rise and gradually drag up the Marker crude price, whilst in times of surplus supply, a reduced premium or even a discount will drag down the Marker crude price. Of course big changes, announcement or events that can significantly influence crude supply levels will sometimes result a large step change in the prices of crude oil (eg. OPEC announcements, civil unrest or wars, hurricane activity, major refinery shutdowns or outages etc).
That is, crude oils being purchased do not always slavishly follow marker crudes. Marker crudes are indicators of what is happening in regional markets.
Thus in times of tight supply this premium will rise and gradually drag up the Marker crude price, whilst in times of surplus supply, a reduced premium or even a discount will drag down the Marker crude price. Of course big changes, announcement or events that can significantly influence crude supply levels will sometimes result a large step change in the prices of crude oil (eg. OPEC announcements, civil unrest or wars, hurricane activity, major refinery shutdowns or outages etc).
That is, crude oils being purchased do not always slavishly follow marker crudes. Marker crudes are indicators of what is happening in regional markets.
Australian Crude Oil Requirements
Australia has seven major operating oil refineries. While Australia has substantial crude oil production, Australian refineries only source a minority of their crude oil requirements from Australian fields.
This is partly because Australia crude oil is generally light and getting lighter. Some heavier crude oils are required to produce heavier products such as lubricating oils and bitumen, and as this occurs Australian refineries (which are in general not designed to process large quantities of the very light crudes), must resort to heavier crude imports.
The other significant reason is that overseas crude oils can be purchased at lower prices. This is a function of the value that all oil refineries place on each possible crude they can purchase. Every refinery has a different configuration of plant and equipment and depending upon the product demand in their particular market, particular refinery limitations, and the different product yields (petrol, diesel, kerosene) that are produced from each crude oil, they will each see slightly different value for every crude oil at a particular point in time. Australian refineries are no different and with the highly competitive Australian market under considerable financial pressure, refiners are always seeking ways of reducing costs, and finding cheaper crudes (or better value crudes) is one of these.
This is partly because Australia crude oil is generally light and getting lighter. Some heavier crude oils are required to produce heavier products such as lubricating oils and bitumen, and as this occurs Australian refineries (which are in general not designed to process large quantities of the very light crudes), must resort to heavier crude imports.
The other significant reason is that overseas crude oils can be purchased at lower prices. This is a function of the value that all oil refineries place on each possible crude they can purchase. Every refinery has a different configuration of plant and equipment and depending upon the product demand in their particular market, particular refinery limitations, and the different product yields (petrol, diesel, kerosene) that are produced from each crude oil, they will each see slightly different value for every crude oil at a particular point in time. Australian refineries are no different and with the highly competitive Australian market under considerable financial pressure, refiners are always seeking ways of reducing costs, and finding cheaper crudes (or better value crudes) is one of these.
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