Market Overview: Crude Oil (CL)

Oil provides about 40 percent of the energy Americans consume and roughly 97 percent of our transportation fuels. Oil is at the crux of the modern economic system, and its importance should not be discounted. Besides meeting almost half of our total energy needs and the lion's share of America's transportation fuel needs, the oil industry employs almost one and a half million people in the United States. Not only is Oil, in one form or another, used to heat our homes and fuel our vehicles, petroleum-based products can be found in a variety of everyday household items, including deodorant, toothpaste, paints, balloons, perfumes and cosmetics.

Crude Oil in its raw form has to be refined to be used. Distillation is the primary method of refining Crude Oil into its resulting products. The Crude Oil is heated at the bottom of a tall metal tower. As Crude gets hotter, it turns to a gaseous state and the vapors rise. When the vapors rise, they cool. Each Crude Oil by-product, in its gaseous state, has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions, like fuel oils and diesel fuel, are taken from the bottom part of the heating tower. Lighter fractions, like butane, gasoline and kerosene, are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products, which are jet fuel, kerosene, motor gasoline, diesel fuel, residual fuel and distillate fuels. The major use of Crude Oil is for refining into its various products, such as gasoline and heating oil.

Seasonal Overview:

Crude Oil, by and large, does not behave in a seasonal nature during the bulk of the year; but, two particular times of year that do behave very seasonally are the summer driving season and the winter heating season.

From mid March through April, refineries begin to gear up refining operations to meet the increased demand for gasoline and jet fuel, since more traveling is done during the summer. The summer driving season increases demand for gasoline, as families across America and Europe go on vacations.

As the summer driving season ends, and the weather gets colder, the demand for all petroleum products wanes - except for some distillate fuels, like Heating Oil. This slowdown in demand is coupled with an increase in supply as oil producing nations in the former Soviet Republic increase production and shipping of oil before their ports ice over during the winter. This slower demand and increased supply typically causes Crude Oil to trend lower from early October through mid November. During the Christmas season, as holiday travel increases, Crude Oil demand increases. Refineries tend to liquidate to stocks before year-end due to tax considerations. This tends to weigh on prices at the end and beginning of the year.

Crude Oil: (High: Oct//Low: Dec) Twin peaks in demand built on pillar of primary product demand. Weakness into Feb. due to reduced demand for heating oil. Strength into Mar-May as inventories of gasoline built prior to US driving/vacation consumption. Lowest consumption of heating oil Jun-Aug, but demand for inventory grows prior to winter. Decline into Dec as refiners sharply curtail purchases to avoid year-end inventory tax.

Chart courtesy of Moore Research Center, Inc.