what is crude oil 
crude oil is a naturally occurring liquid petroleum product composed of hydrocarbon deposits and other organic materials formed from the remains of animals and plants that lived millions of years ago these organisms were covered by layers of sand silt and rock subject to heat and pressure and eventually turned into a type of fossil fuel that is refined into usable products including gasoline diesel liquefied petroleum gases and feedstock for the petrochemical industry 1crude oil is a nonrenewable resource which means that it can t be replaced naturally at the rate we consume it and is therefore a limited resource investopedia nono floresunderstanding crude oilcrude oil is typically obtained through drilling where it is usually found alongside other resources such as natural gas which is lighter and therefore sits above the crude oil and saline water which is denser and sinks below after its extraction crude oil is refined and processed into a variety of forms such as gasoline kerosene and asphalt for sale to consumers crude oil is one of the world s most important commodities and its price can have ripple effects through the broader economy rising oil prices mean higher gasoline prices at the pump higher shipping costs and increased input costs for producers crude oil prices are driven mainly by the principles of supply and demand oversupply and shrinking demand lower prices while rising demand and short supply push prices up perceived supply and demand changes can be driven by geopolitical events or natural disasters that affect oil producing nations investors and speculators can trade oil via futures markets spot markets or exchange traded funds etfs although fossil fuels such as coal have been harvested for centuries crude oil was first discovered and developed during the industrial revolution and its industrial uses were developed in the 19th century newly invented machines revolutionized the way we do work and they depended on these resources to run 2today the world s economy is largely dependent on fossil fuels such as crude oil and the demand for these resources often sparks political unrest as a small number of countries control the largest reservoirs like any industry supply and demand heavily affect the prices and profitability of crude oil the united states saudi arabia and russia are the leading producers of oil in the world 3in the late 19th and early 20th centuries the u s was one of the world s leading oil producers and u s companies developed the technology to make oil into useful products like gasoline 4 during the middle and last decades of the 20th century u s oil production fell dramatically and the u s became an energy importer in 2021 however crude oil net imports were at the second lowest annual level since 1985 56its major supplier was the organization of the petroleum exporting countries opec founded in 1960 which consists of the world s largest by volume holders of crude oil and natural gas reserves 7 as such the opec nations had a great deal of economic leverage in determining supply and therefore the price of oil in the late 20th century in the early 21st century the development of new technology particularly hydro fracturing known as fracking created a second u s energy boom largely decreasing opec s importance and influence 8 heavy reliance on fossil fuels is cited as one of the main causes of global warming a topic that has gained traction in the past several decades risks surrounding oil drilling include oil spills and ocean acidification which damage the ecosystem 9 also in the 21st century many manufacturers have begun creating products that rely on alternative sources of energy such as cars run by electricity homes powered by solar panels and communities powered by wind turbines 10oil is often called black gold yet crude oil has a range of viscosity and can vary in color from black to yellow depending on its hydrocarbon composition 11 distillation the process by which oil is heated and separated into different components is the first stage in refining crude oil vs petroleumpetroleum a name that comes from the latin words petra meaning rock and oleum meaning oil is often used interchangeably with crude oil essentially petroleum is a more general word that refers to crude oil the raw unprocessed oil that is extracted out of the ground and other petroleum products formed from refined crude oil 12petroleum products cover everything that a refinery produces from crude oil or natural gas these products include diesel gasoline fuel oil and more investing in oilinvestors may purchase two types of oil contracts spot contracts and futures contracts to the individual investor oil can be a speculative asset a portfolio diversifier or a hedge against related positions 13large financial institutions and energy companies can also invest in oil and gas production through the use of volumetric production payments vpps which allow oil and gas companies to monetize their fields or proven orders the price of the spot contract reflects the current market price for oil whereas the futures price reflects the price that buyers are willing to pay for oil on a delivery date set at some point in the future the futures price is no guarantee that oil will actually hit that price in the current market when that date comes it is just the price that at the time of the contract purchasers of oil are anticipating the actual price of oil on that date depends on many factors most commodity contracts that are bought and sold on the spot markets take effect immediately money is exchanged and the purchaser accepts delivery of the goods in the case of oil the demand for immediate delivery vs future delivery is limited in no small part due to the logistics of transporting oil investors of course don t intend to take delivery of commodities at all although there have been cases of investor errors that have resulted in unexpected deliveries so futures contracts are more commonly used by traders and investors an oil futures contract is an agreement to buy or sell a certain number of barrels of oil at a predetermined price on a predetermined date when futures are purchased a contract between buyer and seller is signed and secured with a margin payment that covers a percentage of the total value of the contract end users of oil purchase on the futures market to lock in a price investors buy futures essentially as a gamble on what the price will actually be down the road and they profit if they guess correctly typically they will liquidate or roll over their futures holdings before they would have to take delivery there are two major oil contracts that are closely watched by oil market participants in north america the benchmark for oil futures is west texas intermediate wti crude which trades on the new york mercantile exchange nymex 14 in europe africa and the middle east the benchmark is north sea brent crude which trades on the intercontinental exchange ice 15while the two contracts move somewhat in unison wti is more sensitive to american economic developments and brent responds more to those in other countries there are multiple futures contracts open at once with most trading in the front month contract the nearest futures contract for this reason the front month is also known as the most active contract futures prices for crude oil can be higher lower or equal to spot prices the price difference between the spot market and the futures market says something about the overall state of the oil market and expectations for it if the futures prices are higher than the spot prices this usually means that purchasers expect the market will improve so they are willing to pay a premium for oil to be delivered at a future date if the futures prices are lower than the spot prices this means that buyers expect the market to deteriorate backwardation and contango are two terms used to describe the relationship between expected future spot prices and actual futures prices when a market is in contango the futures price is above the expected spot price when a market is in normal backwardation the futures price is below the expected future spot price the prices of different futures contracts can also vary depending on their projected delivery dates forecasting oil priceseconomists and experts are hard pressed to predict the path of crude oil prices which are volatile and depend on many variables they use a range of forecasting tools and depend on time to confirm or disprove their predictions the five models used most often are each mathematical model is time dependent and some models work better at one time than another because no one model alone offers a reliably accurate prediction economists often use a weighted combination of them all to get the most accurate answer in 2014 for instance the european central bank ecb used a four model combination to predict the course of oil prices to generate a more accurate forecast 16 there have been times however when the ecb has used fewer or more models to capture the best results 17 even so unforeseen factors like natural disasters political events or social upheavals can derail the most careful of calculations oil industry informationbecause crude oil prices constantly change and are typically more volatile than stock or currency prices it is crucial for successful investors and traders to have good information sources that report on the many factors that can influence oil prices many websites report crude oil news but only a few broadcast the breaking news and current prices the following three offer current information 