International Oil Pricing Mechanism and Analysis on Oil Price Fluctuation Reasons By Mr. Wang Nengquan, Chief Economist Sinochem International Oil Company, Sinochem Corporation Hyatt Regency,Hangzhou, China 11th September, 2006 SINOCHEM 1
CONTENT Ⅰ. International Oil Price System Ⅱ. International Oil Pricing Mechanism Ⅲ. Main Factors Influencing International Oil Price Ⅳ. The Current International Oil Price Has Deviated Significantly From The Law of Value 2
The Evolvement and Development of International Oil Pricing Method Years Before 1960s 1960s 1970s 1970s 1980s 1970s 1980s Oil pricing method Fixed Price Fixed Price Market Linked Price maker Multinational oil companies Governments of Oil producing countries Market Price basis Marked price Official Fixed Price Benchmark oil The International Crude Oil Pricing Method has been Changing toger with development of Oil Market Structure. 3
The Evolvement and Development of International Oil Trading Methods Financial Institution Market Scale & Participants The Evolvement of International Oil Trading Methods and Tools Futures and Option Trading Company Producer & Consumer Spot Market Term Contract Swap + OTO Option Supplier Consumer Trading Time Mutual Agreement Independent price evaluation Futures Trading/ Standard Contract 4
The Major Five Spot Oil Markets and Three Futures Oil Markets In The World Spot markets: USA Spot markets: North-west Europe HSI NYMEX, 60% Spot markets: Caribbean ICE, 0.4%,60% Spot markets: Mediterranean Spot markets: Singapore 5
The Effect of Spot Market Price The current oil futures trading is evolved intricately from spot transaction to forward trading and finally to futures trading, spot market price is still important to international i oil price system. Before Before 1970s 1970s Spot Spot market market was was served served as as a tool tool for for Majors Majors to to adjust adjust oil oil surplus surplus and and deficiency deficiency and and exchange exchange oil oil products products between between each each or or Spot Spot trading trading only only amount amount to to less less than than 5% 5% of of total total international international oil oil trading trading and and spot spot price price normally normally reflects reflects price price of of term term surplus surplus After After oil oil crisis crisis in in 1973 1973 The The spot spot trading trading increased increased gradually gradually and and oil oil spot spot market market is is no no longer longer a residual residual market market but but became became a marginal marginal market market which which reflects reflects production production and and refinery refinery cost cost of of crude crude oil, oil, and and its its profit. profit. The The spot spot price price has has already already become become benchmark benchmark for for oil oil companies companies and and government government of of oil-consuming oil-consuming countries countries to to make make oil oil policy,at policy,at same same time, time, some some term term contract contract began began to to relate relate to to spot spot market market There There are are two two prices prices in in oil oil spot spot market market one one is is real real spot spot trading trading price price or or price price is is evaluation evaluation made made by by some some organizations organizations through through research research and and track track to to price price level level in in market market 6
Futures Price Dominates International Oil System Definition: The oil futures price can be determined via bidding and asking in an open futures market. For standard oil contract with certain price, quantity and delivery place, those who can reach mutual agreements and strike a bargain earlier in future market can define ir traded price as future price The ranking of energy futures transaction in 2005 Futures Price The futures market has function of price-discovery to some degree and futures price has become beforehand index for change of international oil price. The public bid in oil futures trading houses becomes signal of future market supply-and-demand. The trading houses publish trading information in time for all over world and traders can get price information at any time All crude oil produced in or sold to North America is priced according to WTI as benchmark; crude oil produced in USSR, Africa and Europe or sold to Europe is priced according to BRENT as benchmark; crude oil produced in Middle East and sold from Middle East to Asia is usually priced according to Dubai as benchmark; and crude oil in Far East is priced according to light crude oil --Tapis from Malaysia and Minas of Indonesia 7
The Ranking of Futures Transactions serial number Trading House contract Trading Volume in 2005 Increase Rate 1 NYMEX WTI(1000 BBLS/LOT) 59,650,468 12.80% The 2 IPE BRENT (1000 BBLS/LOT) 30,412,027 19.46% ranking of energy resources terms in 2005 3 4 5 6 MYMEX TOCOM NYMEX NYMEX NATURAL GAS (10 BILLION BTU/LOT) 19,142,549 GASOLINE (100 KILO LITER/LOT) 17,448,561 WTI CRUDE OIPTION (1000 BBLS/LOT) 14,726,263 GASOLINE (1000 BBLS/LOT) 13,166417 9.75% -26.22% 27.91% 3.04% 7 NYMEX HEATING OIL (1000 BBLS/LOT) 13,135,581 1.95% 8 IPE GAS OIL (100 TON) 10,971,719 17.27% 9 SHFE FUEL OIL (10 TON) 9,809,550 8
Content Ⅰ. International Oil Price System Ⅱ. International Oil Pricing Mechanism Ⅲ. Main Factors Influencing International Oil Price Ⅳ. The Current International Oil Price Has Deviated Significantly From The Law of Value 9
The Fixed Price Fixed Price Fixed price is pegging price made between buyer and seller The crude seller usually requires refinery to pay in 30 days after B/L Refinery normally requires buyer to pay in 5-15 days Nowadays, this kind of price method is rarely applied 10
The Crude oil Pricing Mechanism 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 crudes in certain time, but average spot prices before and after trading time, futures f price or offer price from some quote organizations Some crudes adopt quote price in some quote system and put it in formula as benchmark some crudes have to use or crudes quote because y have no quote for mselves The benchmarks in international oil trading are DTD,... WTI, Dubai, Oman, Tapis, Minas and etc. The quote system and price index reflecting spot price: Platts, Argos, Reuters, Associated price, APPI,ICP, RIM The quote in crudes spot market is usually FOB and some crudes use CFR 11
The Product oil s Pricing Method and Basis Pricing method The price mechanism for oil products varies according to different types and ir different specifications But still mainly traded as floating price which is based on a formula Pricing units There are several kinds of pricing units in different areas such as metric tons, U.S. barrels, gallons and liters Pricing basis The pricing basis is mainly quotations published by information agents which is accepted by both parties, such as Platt s, Argus, LOR, Rim etc. 12
The Product Oil s Pricing Period Pricing period The pricing period for oil products are mainly five days around Bill of Lading date, more specifically y are two days immediately prior to B/L date, B/L date, and two days immediately after B/L date. The final price falls on average of 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 13
The Product Oil s Pricing Mechanism There are three main product oil markets in world: Rotterdam in Nerlands New York in United States Singapore in Asia For instance, Platt s s is standard quote announcing organization for products oil in Singapore market, which is announced once every day (excluding weekends and holidays), and nearly all oil products pricing in far east region take Singapore price as reference. 14
Content Ⅰ. International Oil Price System Ⅱ. International Oil Pricing Mechanism Ⅲ. Main Factors Influencing International Oil Price Ⅳ. The Current International Oil Price Has Deviated Significantly From The Law of Value 15
History of International Oil Price Fluctuation Global oil prices since 1861 The international oil price is constantly on move, sometimes out of control, rolling upwards and downwards 16
Main Events in The International Oil Market No. The 1 st time Time Oct 1973 Jan 1974 Price: USD/BBL From 3.110 Up to 11.650 Main Reason The fourth Middle East War, reduction of output and oil embargo Supply- Demand Gap -4,3million bpd The 2 nd time The 3 rd time The 4 th time The 5 th time The 6 th time The 7 th time Dec 1978 Dec 1980 Dec 1985 Oct 1986 Aug 1990 Jan 1991 Oct 1996 -Dec 1998 Dec 1998 -Oct 2000 From 2004 till now From 13.335 Up to 43.000 From 28.000 Down to 6.800 From 16.220 Up to 31.120 From 23.500 Down to 10.600 From 10.600 Up to 35.000 fluctuate at high price Up to 78.000 Since 1970s, global oil price has experienced several significant changes Revolution in Iran and Iraq-Iran War, reduction in output Demand growth slow down after two oil crises, while non-opec countries oil output increased Iraq invaded Kuwait,led to severe damage to oil fields in Kuwait. South-East Asia financial crisis, slow down of global economic growth, less demand for oil South-East Asia financial crisis basically recovered,speed-up of global economic growth, decreased oil storage, supply- restriction executed Limited OPEC spare production ability, bottlenecked refinery processing capability, performance of funds in bidding up prices with geopolitic and wear factors, etc -4million bpd +4million bpd -4,3million bpd +4million bpd - 4million bpd + 1million bpd 17
The Market Supply-Demand and International Oil Price Fluctuation The change of supply-demand structure had led to fluctuation of oil price First, demand increased continuou sly. The global oil demand had risen 20 times than those in 1930 s. Second, oil producing countries have limited ability to expand its production. The investment in oil industry is obviously deficient. Third, most of oil fields are suffering from natural descending of output, but re are few new large fields ever discovered over past thirty years. Fourth, non-middle East oil fields are usually difficult to exploit and high in investment cost, thus y are unable to recover decrease of production of old fields. Fifth, current OPEC oil output is approaching to its maximum capability; spare production capacity had declined from 6 million barrels per day in last 10 years to 1 million barrels per day nowadays. 18
The structure of market participation and International Oil Price Fluctuation Oil price was guided by structural changes in market participation There are many participants in international oil market, whose behavior driven by goal of benefit maximization has a huge impact on international oil prices. Latin America, 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 pricing power of "official price", and began to use oil as weapons. The number of oilproducing 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. 19
The Sales Structure Mode and International Oil Price Fluctuation Oil price was guided by changes in sales structure mode Prior to 1950s, world oil pricing pattern was price system, monopolized by "seven sisters". From 1960 s, until 1970s and 1980s, monopoly was gradually broken. And "official price" and "reference price" were introduced. In 1983, New York commodity exchanges (COMEX) introduced low sulfur light crude oil futures contracts, and it has become barometer guiding price fluctuations in world oil market. As a financial tool, future is separated from actual supply and demand situation in oil production, and affected by numerous factors. So it could be more easily manipulated and controlled 20
CONTENT Ⅰ. International Oil Price System Ⅱ. International Oil Pricing Mechanism Ⅲ. Main Factors Influencing International Oil Price Ⅳ. The Current International Oil Price Has Deviated Significantly From The Law of Value 21
China Is Not The Main Factor to Push Up International Oil Prices As a new participant of international oil market, although re has seen a considerable growth in China s oil imports, however, China is not main factor to push up international oil prices. For example, China s net oil imports amounted to 146.2 million tons in 2005, only accounting for 5.94% of 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 main factor to push up international oil prices 22
Representative non-opec oil supply costs Operating Costs($/bbl) Capital cost($/bbl) fully-built-up costs($/bbl) California heavy oil 6-10 3-4 12 W. Canada heavy oil 7-10 3-4 13 Alberta oil sands 9-12 3-5 15 Venezuela Orinoco 8-10 5-7 15 Mexico heavy oil 2 5-6 8 U.S. Gulf ( > 200metres) 4 4-6 9 Brazil ( > 200 metres) 4 3-5 8 Angola (Girassol field) 3 4 7 Alaska 4--5 3-4 8 American stripper wells 12-24 2-3 20 Malaysia offshore 5-6 8 N. Sea (BP operated & 7 fields) average 4 3-4 8 From The table we can see that re is little relationship between current international oil price and oil production costs 23
The Fund Manipulation and Its Relationship with WTI Price The data analysis in recent years shows that high relativity exits between oil long position held by New York Commodity Exchange Fund and WTI oil price movements. The higher long position it is held, higher WTI prices is, vice versa 24
Oil Has Become One of The Major Targets for Speculative Activity According to statistics by U.S. Commodity Futures Trading Commission By week ended at May 2, 2006, 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 main reason of rising international oil prices in 21st century lies in funds swarming into oil futures s markets from large banks, hedge funds and or speculative capital in recent r years. The crude oil futures have become a tool for financial speculation 25
Conclusion Rising international oil prices, overall, are not conducive to development of world economy. On oil industry itself, high international oil prices may bring a round of low oil price. After second oil crisis from 1978 to 1980, oil prices remained low for 10-year-period since beginning of 1986. Therefore, high oil prices will be detrimental to sustainable development of world oil industry. United States and China are both big powers of world's oil production and consumption countries, refore governments and oil industry of two countries have responsibility and obligation to collectively maintain stability of international oil market and price China s oil industry is willing to work toger with United States and or counterparts throughout world to strengn bilateral and multilateral cooperation, exploit petroleum resources through investment, and increase supply of oil; to reduce excessive dependence on oil consumption through use of new technologies and new energy sources; to increase transparency of world oil market through information exchange, and or means, to contribute to stability of world oil market, and economy development of China and world 26
谢 谢! Thanks SINOCHEM 27