3. Features of petroleum price cycles
The market for crude oil is large, liquid and global. There are multiple types of crude oil, reflecting the different geological circumstances of their occurrence. However, the prices of different crudes tend to move in line with each other, differences in quality and location being reflected in premiums and discounts to the quoted benchmark grades. Figure 2 shows monthly average prices for two of the most important benchmark grades, Brent Blend in the North Sea and West Texas Intermediate (WTI) in USA.
Crude oil is mainly sold on spot markets or term contracts. The prices for such sales, whatever their types, are mostly related to the spot prices of selected benchmark grades, with the consequence that the fluctuations of spot prices are quickly propagated to all the oil markets explaining the observed world price volatility.
The market for natural gas is more regionally based than that for crude oil since the difficulties and cost of moving natural gas long distances prevent it from being a truly global market. Natural gas either has to be transported to market through pipelines or else converted into liquid form (Liquefied Natural Gas, LNG) and shipped. There is no particular reason why different regional markets for natural gas need to move in step with one another – and they frequently don’t – but natural gas shares many of the same demand drivers as oil, and indeed other commodities, and, over time, tends to experience similar price cycles, as illustrated in this graph.