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 New York Mercantile Exchange (Nymex) and at the International Petroleum Exchange in London (IPE). The Nymex 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 – NYMEX West Texas Intermediate (WTI) crude oil prices on a nearest-futures basis traded near $80 per barrel in the first half of 2010 with a slight upward bent as the global economy strengthened and posted a 1-1/2 year high of $87.15 per barrel in May 2010. Crude oil prices then plummeted to a 1-year low of $64.24 per barrel in late-May 2010 as the European sovereign-debt crisis intensified. Crude prices recovered and moved higher into the year-end and in December 2010 posted a 2-1/4 year high of $92.06 per barrel, finishing the year 15% higher at $91.38. The explosion of British Petroleum’s leased Deepwater Horizon drilling-rig over its Macondo well in the Gulf of Mexico in April 2010 led to the largest oil spill in U.S. history and prompted a temporary halt in all deep-sea drilling in the Gulf of Mexico as the U.S. government toughed drilling regulations. This was a long-term bullish development and highlights the difficulty the oil industry will have in economically developing reserves and meeting demand in coming years. Crude oil prices remained generally strong in 2010 despite adequate inventories during the year. Crude oil and gasoline prices rallied in early 2011 on widespread protest movements throughout North Africa and the Middle East that resulted in new governments in Tunisia and Egypt. Crude oil prices rallied to a 2-1/2 year high of $106.95 per barrel in March 2011 as a civil war in Libya, Africa’s third-biggest oil producer, cut its normal crude output of 1.6 million bpd by more than half.

Supply – World crude oil production in 2010 rose +1.6% yr/yr to 73.497 million barrels per day, which was a new record high. The world’s largest oil producers in 2008 were Russia (with 12.7% of world production in 2006), Saudi Arabia (12.6%), the United States (6.7%), Iran (5.5%), China (5.1%), and Mexico (3.8%). U.S. crude oil production in 2010 rose +2.5% yr/yr to 5.495 million barrels per day. Alaskan production in 2010 fell –7.3% yr/yr to 598,000 barrels per day, the lowest level since 1977 and only 34% of the peak level of 2.017 million barrels per day seen in 1988.

Demand – U.S. demand for crude oil in 2010 rose +2.3% yr/yr to 14.671 million barrels per day, below the 2004 record high of 15.475. Most of that demand went for U.S. refinery production of products such as gasoline fuel, diesel fuel, aviation fuel, heating oil, kerosene, asphalt, and lubricants.

Trade – The U.S. is highly dependent on imports of crude oil to meet its energy needs. U.S. imports in 2010 rose +1.4% yr/yr to 9.141 million barrels per day, down from the 2005 record high of 10.126. U.S. imports of petroleum products in 2010 fell –6.8% to 1.977 million barrels per day, imports of distillate fuel oil fell -1.8% yr/yr to 221,000 barrels per day, and imports of residual fuel oil rose +15.1% yr/yr to 381,000 barrels per day.

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here