international oil pricing mechanism and analysis on oil … 12- wang nengquan... · ·...

1SINOCHEM

The Seventh US-China OGIF

By Mr. Wang Nengquan, Chief Economist Sinochem International Oil Company, Sinochem Corporation

International Oil Pricing Mechanism and Analysis on Oil Price Fluctuation Reasons

Hyatt Regency，Hangzhou, China11th September, 2006

2The Seventh US-China OGIF

Ⅰ. International Oil Price System

Ⅱ. International Oil Pricing Mechanism

Ⅲ. Main Factors Influencing the International Oil Price

Ⅳ. The Current International Oil Price Has Deviated Significantly From The Law of Value

CONTENT


The Evolvement and Development of International Oil Pricing Method

1960s — 1970s1960s 1960s —— 1970s1970sBefore 1960sBefore 1960sBefore 1960s

Fixed PriceFixed PriceFixed PriceFixed Price

Governments of Governments of Oil producing Oil producing

countriescountriesMultinational Multinational oil companiesoil companies

Official Fixed Official Fixed PricePriceMarked priceMarked price

1970s — 1980s1970s — 1980s

Market Linked

Market

Benchmark oil

Years

Price maker

Oil pricingmethod

Pricebasis

The International Crude Oil Pricing Method The International Crude Oil Pricing Method has been Changing together with the has been Changing together with the development of Oil Market Structure.development of Oil Market Structure.


The Evolvement of The Evolvement of International Oil International Oil Trading Methods and Trading Methods and ToolsTools

SupplierSupplier——Consumer Consumer TradingTrading

Spot MarketSpot Market

Term ContractTerm Contract

Swap + OTO OptionSwap + OTO Option

Futures and OptionFutures and Option

Mutual AgreementMutual Agreement Independent price Independent price evaluationevaluation

Futures TradingFutures Trading／／Standard ContractStandard Contract

TimeTime

ProducerProducer&&

ConsumerConsumer

Trading Trading CompanyCompany

Financial Financial InstitutionInstitution

Market Scale Market Scale & &

ParticipantsParticipants

The Evolvement and Development of International Oil Trading Methods


NYMEX, , 60%

ICE，0.4%，60%

HSISpot markets: North-west Europe

Spot markets:Caribbean

Spot markets: Mediterranean

Spot markets: USA

Spot markets:Singapore

The Major Five Spot Oil Markets and Three Futures Oil Markets In The World


There are two prices in oil spot marketone is real spot trading pricethe other price is the evaluation made by some organizations through the research and track to the price level in the market

There are two prices in oil spot marketone is real spot trading pricethe other price is the evaluation made by some organizations through the research and track to the price level in the market

The spot price has already become the benchmark for oil companies and the government of oil-consuming countries to make the oil policy，At the same time, some term contract began to relate to spot market

The spot price has already become the benchmark for oil companies and the government of oil-consuming countries to make the oil policy，At the same time, some term contract began to relate to spot market

Before 1970sSpot market was served as a tool for Majors to adjust oil surplus and deficiency and exchange oil products between each otherSpot trading only amount to less than 5% of total international oil trading and the spot price normally reflects the price of term surplus

Before 1970sSpot market was served as a tool for Majors to adjust oil surplus and deficiency and exchange oil products between each otherSpot trading only amount to less than 5% of total international oil trading and the spot price normally reflects the price of term surplus

After the oil crisis in 1973The spot trading increased gradually and the oil spot market is no longer a residual market but became a marginal market which reflects the production and refinery cost of crude oil, and its profit.

After the oil crisis in 1973The spot trading increased gradually and the oil spot market is no longer a residual market but became a marginal market which reflects the production and refinery cost of crude oil, and its profit.

The current oil futures trading is evolved intricately from spotThe current oil futures trading is evolved intricately from spot transaction to transaction to forward trading and finally to futures trading, the spot market forward trading and finally to futures trading, the spot market price is still price is still important to the iimportant to the international oil price system.nternational oil price system.

The Effect of Spot Market PriceSpot Market Price


Definition:Definition: The oil futures price can be The oil futures price can be determined via bidding and asking in an determined via bidding and asking in an open futureopen futuress market. For the market. For the ““standard oil standard oil contractcontract”” with certain price, quantity and with certain price, quantity and delivery place, those who can reach delivery place, those who can reach mutual agreements and strike a bargain mutual agreements and strike a bargain earlier in the future market can define earlier in the future market can define their traded price as the their traded price as the ““future pricefuture price””

The futures market has the function of price-discovery to some degree and the futures price has become the beforehand index for the change of international oil price. The public bid in oil futures trading houses becomes the signal of future market supply-and-demand. The trading houses publish the trading information in time for all over the world and traders can get the price information at any time

The The rankingranking of energy of energy futures futures transaction transaction in 2005in 2005

All the crude oil produced in or sold to North America is priced according to the WTI as the benchmark; the crude oil produced in USSR, Africa and Europe or sold to Europe is priced according to BRENT as the benchmark; the crude oil produced in Middle East and sold from Middle East to Asia is usually priced according to Dubai as the benchmark; and the crude oil in Far East is priced according to the light crude oil --Tapis from Malaysia and Minas of Indonesia

FuturesFuturesPrice Price

Futures Price Dominates the International Oil System


The The

rankingranking of of

energy energy

resources resources

terms in terms in

20052005

The Ranking of Futures Transactions

9,809,550FUEL OIL (10 TON)SHFE9

17.27%10,971,719GAS OIL （100 TON）IPE 8

1.95%13,135,581HEATING OIL (1000 BBLS/LOT)NYMEX7

3.04%13,166417GASOLINE (1000 BBLS/LOT)NYMEX6

27.91%14,726,263WTI CRUDE OIPTION (1000 BBLS/LOT)NYMEX5

-26.22%17,448,561GASOLINE (100 KILO LITER/LOT)TOCOM4

9.75%19,142,549NATURAL GAS (10 BILLION BTU/LOT)MYMEX3

19.46%30,412,027BRENT (1000 BBLS/LOT)IPE2

12.80%59,650,468WTI(1000 BBLS/LOT)NYMEX1

Increase Rate

Trading Volume in 2005

contractTrading House

serial number






Content


Fixed PriceFixed PriceFixed price is the pegging price made between buyer and seller

The crude seller usually requires the refinery to pay in 30 days after the B/L

Refinery normally requires the buyer to pay in 5-15 days

Nowadays, this kind of price method is rarely applied

The Fixed Price


The benchmarks in international oil trading are DTD, WTI, Dubai, Oman, Tapis, Minas and etc.

The quote system and price index reflecting the spot price: Platts, Argos, Reuters, Associated price, APPI,ICP, RIMThe quote in crudes spot market is usually FOB and some crudes use CFR

...

Many crude oil term contracts apply formula calculations, which means to take one or several crudes prices as reference and plus a premium, it is also called floated price. The reference price is not a specific trading price of some crudThe reference price is not a specific trading price of some crudes in certain time, es in certain time, but the average spot prices before and after the trading time, fbut the average spot prices before and after the trading time, futures price or the utures price or the offer price from some quote organizationsoffer price from some quote organizations

Some crudes adopt the quote price in some quote

system and put it in the formula as the benchmark

some crudes have to use other some crudes have to use other crudes crudes ‘‘ quote because they quote because they

have no quote for themselveshave no quote for themselves

The Crude oil Pricing Mechanism


The price mechanism for oil products varies according to different types and their different specificationsBut still mainly traded as “floating price” which is based on a formula

Pricing method

There are several kinds of pricing units in different areas such as metric tons, U.S. barrels, gallons and liters

Pricing units

The pricing basis is mainly quotations published by information agents which is accepted by both parties, such as Platt’s, Argus, LOR, Rim etc.

Pricing basis

The Product oil’s Pricing Method and Basis


Pricing periodThe pricing period for oil products are mainly five days around Bill of Lading date, more specifically they are two days immediately prior to the B/L date，the B/L date, and two days immediately after the B/L date. The final price falls on the average of the five mean quotations

There are also some special pricing methods if mutually agreed

The trade for oil products is more active than crudes and with multiple modes

The Product Oil’s Pricing Period


There are three main There are three main product oil markets product oil markets in the worldin the world：：

Rotterdam in Netherlands

New York in United States

Singapore in Asia

For instance, PlattFor instance, Platt’’s is the s is the standard quote announcing standard quote announcing organization for products oil organization for products oil in Singapore market, which in Singapore market, which is announced once every is announced once every day (excluding the day (excluding the weekends and holidays), weekends and holidays), and nearly all the oil and nearly all the oil productsproducts’’ pricing in the far pricing in the far east region take Singapore east region take Singapore price as reference.price as reference.

The Product Oil’s Pricing Mechanism






Content


Global oil prices since 1861

The international oil price is constantly on the move, sometimesout of control, rolling upwards and downwards。

History of International Oil Price Fluctuation


Since 1970s, the global oil price has experienced Since 1970s, the global oil price has experienced several significant changesseveral significant changes

Main Events in The International Oil Market

+ 1millionbpd

Limited OPEC spare production ability, bottlenecked refinery processing capability, performance of funds in bidding up prices with geopolitic and weather factors, etc

fluctuate at high priceUp to 78.000

From 2004 till now

The 7th

time

- 4millionbpd

South-East Asia financial crisis basically recovered，speed-up of global economic growth，decreased oil storage, supply- restriction executed

From 10.600Up to 35.000

Dec 1998-Oct 2000

The 6th

time

+4millionbpd

South-East Asia financial crisis, slow down of global economic growth, less demand for oil

From 23.500Down to 10.600

Oct 1996-Dec 1998

The 5th

time

-4,3million bpd

Iraq invaded Kuwait，led to severe damage to oil fields in Kuwait.

From 16.220Up to 31.120

Aug 1990 –Jan 1991

The 4th

time

+4millionbpd

Demand growth slow down after the two oil crises, while non-OPEC countries’ oil output increased

From 28.000Down to 6.800

Dec 1985 –Oct 1986

The 3rd

time

-4millionbpd

Revolution in Iran and Iraq-Iran War, reduction in output

From 13.335 Up to 43.000

Dec 1978 –Dec 1980

The 2nd

time

-4,3million bpd

The fourth Middle East War, reduction of output and oil embargo

From 3.110Up to 11.650

Oct 1973 –Jan 1974

The 1st

time

Supply-Demand

GapMain ReasonPrice:

USD/BBLTimeNo.


First, the demand increased continuously. The global oil demand had risen 20 times than those in the 1930’s.

Second, oil producing countries have limited ability to expand its production. The investment in oil industry is obviously deficient.

Third, most of the oil fields are suffering from natural descending of output, but there are few new large fields ever discovered over the past thirty years.

Fourth, the non-Middle East oil fields are usually difficult to exploit and high in investment cost, thus they are unable to recover the decrease of production of the old fields.

Fifth, the current OPEC oil output is approaching to its maximum capability; the spare production capacity had declined from 6 million barrels per day in the last 10 years to 1 million barrels per day nowadays.

The change of the supply-demand structure had led to fluctuation of the oil price

The MarketMarket Supply-Demand and and International Oil Price Fluctuation


Oil price was guided by the structural changes in market participation

There are many participants in the international oil market, whose behavior driven by the goal of “benefit maximization” has a huge impact on the international oil prices.

Latin America, the Middle East and Africa have emerged National liberation movement and nationalization wave, gradually took over its sovereignty and oil rights, and established OPEC. They obtained the pricing power of "official price", and began to use the oil as weapons.

The number of oil-producing countries has increased from about 20 by 1950s to about 30 by 1970s and 1980s, and more than 50 by 1990s. The oil market has formed a multi-polar pattern.

The structure of market participation andandInternational Oil Price Fluctuation


As a financial tool, the future is separated from the actual supply and demand situation in oil production, and affected by numerous factors. So it could be

more easily manipulated and controlled

Oil price was guided by the changes in sales structure mode

Prior to the 1950s, the world oil pricing pattern was “price system”, monopolized by "seven sisters".

From the 1960’s, until the 1970s and the 1980s, the monopoly was gradually broken. And the "official price" and the "reference price" were introduced.

In 1983, the New York commodity exchanges (COMEX) introduced low sulfur light crude oil futures contracts, and it has become the barometer guiding the price fluctuations in the world oil market.

The Sales Structure Mode and and International Oil Price Fluctuation






CONTENT


As a new participant of international oil market, although there has seen a considerable growth in China’s oil imports, however, China is not the main factor to push up the international oil prices.

For example, China’s net oil imports amounted to 146.2 million tons in 2005, only accounting for 5.94% of the total world oil trade, and it had decreased by about 3.5 million tons compared with 149.7 million tons imports in 2004.

Therefore, it is impossible for China to be the main factor to push up international oil prices

China Is Not The Main Factor to Push Up International Oil Prices


From The table we can see that there is little relationship betFrom The table we can see that there is little relationship between ween the current international oil price and oil production coststhe current international oil price and oil production costs

83－4average 4N. Sea (BP operated & 7 fields)85－6Malaysia offshore

202－312－24American stripper wells83－44－-5Alaska743Angola (Girassol field)83－54Brazil ( > 200 metres)94－64U.S. Gulf ( > 200metres)85－62Mexico heavy oil

155－78－10Venezuela Orinoco153－59－12Alberta oil sands133－47－10W. Canada heavy oil123－46－10California heavy oil

fully-built-upcosts($/bbl)

Capitalcost($/bbl)

Operating Costs($/bbl)

Representative non-OPEC oil supply costs


The data analysis in recent years shows that high relativity exits between the oil long position held by New York Commodity Exchange Fund and WTI oil price movements. The higher long position it is held, the higher the WTI prices is, vice versa

The Fund Manipulation and Its Relationship with WTI Price


According to the statistics by U.S. Commodity Futures Trading CommissionBy the week ended at May 2, 2006, the crude oil net long position held by Non-commercial institution speculators was high to a new level this year in New York CFTC.Net long positions held by Non-commercial institution speculators increased by 94,094 hand, which hit a history record.Also, contracts without offset reach a record high with more than 1 million hand.

We believe that the main reason of the rising international oil We believe that the main reason of the rising international oil prices in prices in the 21st century lies in the funds swarming into the oil futurethe 21st century lies in the funds swarming into the oil futures markets s markets from large banks, hedge funds and other speculative capital in rfrom large banks, hedge funds and other speculative capital in recent ecent years. The crude oil futures have become a tool for financial spyears. The crude oil futures have become a tool for financial speculationeculation

Oil Has Become One of The Major Targets for Speculative Activity


Rising international oil prices, overall, are not conducive to the development of the world economy. On the oil industry itself, high international oil prices may bring a round of low oil price. After the second oil crisis from 1978 to 1980, the oil prices remained low for 10-year-period since the beginning of 1986. Therefore, high oil prices will be detrimental to the sustainable development of the world oil industry. United States and China are both big powers of world's oil production and consumption countries, therefore the governments and the oil industry of the two countries have the responsibility and obligation to collectively maintain the stability of international oil market and price

China’s oil industry is willing to work together with the United States and other counterparts throughout the world to strengthen bilateral and multilateral cooperation, exploit petroleum resources through investment, and increase the supply of oil; to reduce the excessive dependence on oil consumption through the use of new technologies and new energy sources; to increase the transparency of world oil market through information exchange, and other means, to contribute to the stability of the world oil market, and the economy development of China and the world

Conclusion

27SINOCHEM

The Seventh US-China OGIF

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international oil pricing mechanism and analysis on oil … 12- wang nengquan... · ·...

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