Everything you need to know about how crude oil is extracted, the products derived from it, key terminology and the global manufacturing process.
In today's video, I'm having a look at oil as a commodity and why it might be able to help you in your trading decisions around oil.
Hello and welcome to another ACY Securities market tutorial. My name is Alistair Schultz. I'm going to be a host through today's trading journey. In today's video, I'm looking at the idea of oil from start to finish. It's when it's in its exploration phases all the way down to when it finally reaches us as the consumer. It's not so much about your trading idea today for it, but it's about giving you an understanding behind the commodity itself and hopefully influencing how you might think about oil and some of your trading positions in the future. The first thing that sort of make note of is that when we think of a barrel of oil or crude oil, we don't usually think of all the other products that are actually derived from it. So in the illustration I've got for you here, you can actually see that there is a lot more to it.
When they produce a 43 gallon drum, they actually after refinery have 44 gallons. So most of the time you see that the top three sort of distillers so they get out of it, I likely to be fuel sources be diesel, gasoline, kerosene and a variety of other manufacturers including lubricants and other parts that you might not usually expect. Now that all comes into importance when it gets down to the consumer level because that's where it's ultimately being used. It is down at that very bottom level where we're all using it. It's being used in manufacturing and other parts of industry in engines, you name it, it's all there. But it also gets derived into petrochemicals which are also used for cleaning and a variety of other sources, so definitely something to consider. I've got this list up here for you now to have a look at what some of those are now.
If you feel feel like it, have a look and check them out and might give you a little bit more understanding in another industry or perhaps a little bit more in depth about oil. Now when we think about oil, it does come in different grades. I normally will use to think of the idea that oil was just a product and it was all the same. It's not. It comes in very different forms and some of the terminology that's used is viscosity. The idea of how, how much it might evaporate as well, and of course how toxic it is to the environment. The terminology that I've got here for you today is the viscosity, which means how fast it actually flows. This makes a difference when you consider the idea of how easily it is to extract from the ground. High viscosity means that they can pump more oil much quicker.
When you get to the other side on the volatility, usually when you think of volatility, it's about how easy it can can explode, but in this case it's about the evaporation process. Most liquid will generally evaporate in this instance is no different. Does the oil evaporate quickly or slowly does that and that will also impact the manufacturing process because it means you've got to get it into storage much quicker and into sealed containers very early on. Now when you think about the toxicity, that's an obvious one. How deadly is it to the environment, local foreigner and Florida and of course us as the people actually trying to get it out. So that is all the three components they really think about when it comes to grading crude oil. In this image here, I've got a couple of different grades of crude oil. You can see that on the far right hand side we've got a nice beaker there.
There are very brightly coloured oil. Well. On the left hand side we have some very dark looking stuff, which is usually what we actually think about when we think about oil. The far right is what we consider as a high grade oil and moving into those sort of grades, you have them vary from nature to what they actually are. Now in this chart here, I've indicated what you might be thinking when you think of benchmark oils. So WTI crude oil is considered to be a nice sweet oil. It's on the far right hand side in terms of quality and the grade of it. Whilst when we go to the left, we have the OPEC basket side of things. Now the OPEC basket is really just a mix of all OPEC members and they kind of pump oil together to try and get a better or worse crude oil than what might be derived at the time.
So you can see where that sort of sits on a sliding scale for you that Brent is kind of usually considered to be the world Mark benchmark for the middle point. So everyone's sort of goes, is it better than the brand or is it worse than the brand? And that's how they sort of derived that bit of that idea. Some of the key components that actually look for stuff like sulphur, the more sulphur oil means that you have to have slightly different engine components to sort of fit. Now, if you look at BMW back in the early days of exporting themselves over to the US and doing manufacturing during the sort of 2000 era that were using what they call a lamisil engine liners for the pistons. Now, whilst that might be all well and good in a high sulphur content fuel, it doesn't work that well.
It actually causes problems, so they all had to replace them with Nica seal instead. So it does matter what type of crude oil you're getting and to what machine you're going to be using it in. Now the next sort of thing is sort of considering the oil process is how do they actually get the different chemicals along the way heating it. Obviously it gives different properties to what the oil might be. So in this chart I've got here illustrated shows the temperatures that they actually have to heat the oil to and where it ends up being at the top of the scale and at the bottom of the scale, giving you an idea of where you might get a variety of different chemicals. So if you feel like getting a little bit more in depth with the heating and the temperatures that they use and of course what temperature produces what product, then feel free to pause the screen now and have a quick look.
Now the next part of this is really all about the oil pipelines and where the streams are in terms of moving from product to person to consumer. Now the first thing to sort of consider here is what we have as upstream. So upstream is during your exploration and production phase. So that is going and finding where the oil is, the whole process around searching for it and as well tapping and drilling for it wherever it may be. So that are your upstream providers. Now these guys generally have to be concern about the price of oil because no matter what further down the stream as we go along, you'll see that there are actually fixed prices for certain things. Now the next lot of streams that we have here is the storage and transport. So this is still considered to be in the in between the upstream and the midstream side of things.
Now in the upstream component, obviously you have to store the oil and then transport to your transport it to your refinery. So they're kind of like the middleman here. They are a fixed cost in most instances for storing a certain amount of oil for a certain period of time. Much like your storage phase. If you were to put furniture or white goods or whatever it may be from your home, you have a fixed cost per month. In this case it's exactly the same. They have a limited amount of supply and they have a limited amount of capabilities in how much they can actually put oil into big points. Now you might've heard recently in the news this idea of tank topics and what does that exactly mean? Well, tank topping is literally the idea that when you have a big barrel of crude oil and you've got to think of these things as much bigger than you or I standing and bigger than most trucks because they put millions of litres into them.
The idea here is that when the top of the tank is starting to get touched by oil, then that is what we consider to be the tank top or it's at capacity. So when you hear about tank topping in the news, you'll have a little bit more understanding about that side of things. Now when we move into the midstream sort of stuff, we're looking here at the refinement processes and actually getting it from being crude oil into those core products that I spoke about earlier in the day. Now if you consider that how much it might cost to actually make a barrel of refined oil, that tends to be also a fixed cost provided that the additives that they have to put in to make some of the other chemicals remain at the same price. But on the whole, the actual cost of running the operation and actually having all the machinery being capable of doing it is a fixed cost.
So therefore the upstream guys suffer here. If oil prices are low because they're not going to be getting this, they're not going to get a scale or sliding scale for how much the refining might cost per barrel. So in that case, they really, the upstream guys really do rely on their income being derived from the value of crude oil in its raw format. The higher the price, the more they make the lower the price, the chance that they offset and risk themselves not being able to actually financially meet their goals. When it comes to the wholesale and the retail side, this is when we start to see the distribution. So this is where we might be looking at BHP Billiton and getting the actual fuel down to your BHP service stations. So eventually from this point it's about really the wholesale trading market. And this might include in the futures markets as well as to when you might take delivery and what you might be speculating on your prices with.
This is sort of the level that we tend to find that most of the bigger guys or the upstream people actually make their money. The next components are sort of looking at is actually moving it onto us as the consumer. So this means getting it to the bows up and of course getting it into our cars, our homes, and a variety of other places. Now when it goes to the Bowzer, they get paid a forward that they pay for a forward contract. So if you think of your, your local service station or your fuel supplier, then they will likely be buying the contracts a couple of months in advance and then getting delivery of it, which is why you might not see the fluctuation in oil prices affect the fluctuation in fuel prices because there is a lag on what happens. So whatever happens in the oil market and what we see in oil futures will likely take several months to actually transpire and travel and trickle its way down to what we get at the bows up. When it comes to the consumer side of things, there are so much that oil is useful, we use it for heating, we use it for our vehicles, we use it for planes, we use it for cooking. There are so many things and places that we can actually be using oil that we don't even consider in our daily lives. So it is one of the things that you might want to do after this video is actually look at all the different uses for refined fuel oil and all the other additives that come out of it. Anyways, this is all I've really got for this video today, so I am hoping that it has been informative for you all and that it might help you think about some of your trading decisions in the future around oil. If you have any questions on today's video or any of the other content that I provide, feel free to shoot me an email at. Talk to al@acy.com and of course licensed subscribed the videos. You can get more great tutorials from me and ACY Securities in the future. Have a great trading day ahead.
