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Oil Fundamentals: Crude Oil Grades And Refining Process

First of all, I would like to provide credit to Liying Zhao (Options Engineer at HyperVolatility) for serving to me to conceptualize this article and to assemble the mandatory information to develop it. There shall be different articles describing the bodily facet of the crude oil market so this is solely “the first gear of a more complex apparatus”.

The present evaluation is not a quantitative analysis on the oil market and its aim is to checklist crucial elements to consider before investing or trading the black gold. Consequently, the main target will primarily be on the petroleum bodily market and on how the oil business works. The HyperVolatility crew spends api oil classification an excessive amount of time analyzing and trading commodity markets, hence, crude oil positions have all the time had a considerable weight in our portfolio. Additionally, the good attention in the direction of commodity markets generated by the credit crunch and the constantly excessive quantity on crude oil futures and options are a few of the explanations that convinced us to put collectively a general guideline for many who select to venture into vitality markets and specifically fossil fuels.

To begin with, it’s value mentioning that there are nearly 250 several types of crude oils on this planet however those which are mentioned the most are primarily 2: the American West Texas Intermediate and the European Brent Blend (which is now the worldwide benchmark).It’s not unusual to listen to monetary journalists speaking about different crude oils like the Nigerian Bonny, the Arab Light (Saudi) or the Dubai (UAE); however, the spotlight is sort of exclusively on WTI and Brent. The reason these markets, notably the Brent, have so much media protection is due to their significance when pricing other crude oils worldwide. Again, the Brent is the these days international benchmark (though the WTI used to have this position) so each oil producer or buyer must know its price; the question is why

Why all other crude oils must be priced based on Brent worth fluctuations
The reply to this question is API gravity, sulphur content and export.

As we previously talked about there are numerous types of crude oils on the planet but the chemical composition of every crude grade differs slightly. Crude oil is a fossil gasoline and it is product of hydrocarbons (molecules of hydrogen and carbon atoms) however what makes the actual distinction, in terms of business value, is the load of the hydrocarbons. The rule is easy: the lighter, the better. In order to determine how heavy or light petroleum liquids are the American Petroleum Institute introduced a standardized scale called API gravity. The API gravity system is a standardized means to compare and rank the “lightness or heaviness” of various crude oils. The system is very simple: the API gravity coefficient measures how heavy or light petroleum liquids are with respect to water. Crude oils with an API gravity greater than 10 are thought of to be light (so they float on water) whereas oils with API lower than 10 are categorised as heavy (so they sink when mixed with water). Crude oils with high API values (10 and higher) are lighter and produce higher amount of marketable product, hence, they are extra commercially desirable. This concept may be better understood by looking at the next chart (source: The International Crude Oil Market Report):

The graph displays the distribution of different crude oils in accordance with API gravity (X axis) and sulphur content (Y axis). It is simple to note that WTI and Brent are both situated in the suitable – hand side of the chart and they’re very close to the X axis. The rationale these oils are situated on this area is as a result of their API gravity may be very high (which implies they’re mild forms of oil) and their sulphur content material is decrease than 0.5% which implies they are candy (the phrase “sweet” in technical jargon means that there’s a low level of impurity).

Let’s summarize what has been said up to now:
1) API gravity measures the lightness / heaviness of crude oils

2) API larger than 10 signifies that the crude oil is light and extra profitable in terms of economic worth

three) API lower than 10 implies that the crude oil is heavy and produces a minor amount of commercial product after refining

4) Sulphur content material measures the diploma of pureness of crude oil, the level of impurity that every crude oil sort comprises

5) Sulphur content increased than zero.5% indicates a excessive degree of impurity (sour crude oil) that needs to be removed

6) Sulphur content material decrease than 0.5% implies a low stage of impurity (sweet crude oil). This situation is most well-liked because less work is required and the refining process is faster

7) All of the crude oils ranked at the underside of the correct hand side of the chart are thought of to be essentially the most enticing underneath a commercial perspective

The aforementioned bullet points clarify pretty properly why the Brent is top-of-the-line crude oils in the world however why is it better than the WTI

The reply is straightforward: the European Brent is exported whereas the West Texas Intermediate stays within the US. Consequently, the WTI has a “minor impact” on worldwide markets (in reality, a part api oil classification of the Alaskan oil output is exported to Japan and South Korea however the amount is so small to be irrelevant when it comes to international impression).

There are different chemical and physical facets that need to be talked about when speaking about crude oil and one of these is certainly viscosity. Viscosity is the “ability” of a selected crude oil or refined product to stream.

Why is this factor important
The diploma of viscosity is very important to find out how crude oil will probably be stored or transported which signifies that the cost of carry will likely be primarily influenced by this variable. Crude oils will be labeled in accordance with their viscosity coefficient:

1) Paraffinic crude oils have low viscosity but they’re simply flammable. Many of the engines lubricating oils are product of paraffinic crude oil. Paraffinic oils have a high API gravity and due to this fact are typically mild kinds of crude oil

2) Naphthenic (or Asphaltic) crude oils have a high viscosity coefficient however they are not simply flammable. That is the case of bitumen. Naphthenic oils have low API gravity and therefore tend to be heavy sorts of crude oil

This classification could be very useful because it helps us understand a bit better how the refining process works. Let’s mix all the knowledge together:

– Light and sweet crude oils (Brent, WTI, Bonny) have high API gravity, low sulphur content, low viscosity, excessive flammability and due to this fact are paraffinic oils. Light and candy crude oils, as soon as refined, have a tendency to provide high quantity of gasoline

– Heavy and bitter oils (Venezuelan BCF, Russian Urals crude, and so forth) have low API gravity, high sulphur content material, high viscosity, low flammability and subsequently are naphthenic oils. Heavy and bitter crude oils, as soon as refined, have a tendency for use as bitumen feedstock

The refining course of aims to separate petroleum liquids in several chemical elements which can be subsequently treated and combined with solvents to generate new oil derivatives.

How does the method work
The crude oil is essentially pumped right into a furnace and here the uncooked petroleum releases gases and liquids that are subsequently channeled in a tower to begin the fractional distillation course of. The purpose of directing the oil in this tower is to separate or fractionate totally different chemical parts utilizing heat. Specifically, each chemical part may have a specific boiling level and by rising the temperature each constituent api oil classification will start vaporizing as soon as its own boiling point might be reached. This course of is gradual so the crude oil will fractionate into completely different gases at completely different temperatures but additionally it is steady, which signifies that new raw petroleum liquid will be injected into the distillation tower at regular intervals to substitute the fluid that has been already fractioned. The refining process normally produces a standardized set of oil derivatives such as gasoline, jet gas, diesel fuel and asphalt. However, different products (methane, propane, kerosene, and many others) are often distillated. Oil derivatives have a variety of functions; right here we listing some of them:

1) Methane additionally knows as natural gas, can be used for heating
2) Ethane is usually employed as a feedstock for other manufacturing processes (just like the one adopted to provide plastic)

three) Propane can be utilized for both cooking and heating
4) Gasoline is primarily used as fuel for automobiles

5) Naphtha is another feedstock and it is usually reused within the petrochemical business
6) Kerosene (known as paraffin in UK, Eire, South Asia and South Africa) is predominantly employed to provide Jet gas oil

7) Gas oils are used to distillate diesel engine fuels or for dwelling heating
8) Fuel oils are reused to energy refineries or power stations. Alternatively, they are sometimes utilized as a gasoline for ships but on this case they’re known as bunker gasoline or bunker gas oil

Now, this info is certainly crucial to anybody who is seriously thinking to speculate or commerce oil markets. Oil fundamentals are sometimes neglected however a sound understanding of the dynamics underlying the fossil gas trade is crucial to totally comprehend market movements. As we anticipated at first of this article, this is simply the primary part of a broader project.

If you are fascinated by trading crude oil chances are you’ll wish to read some HyperVolatility researches dealing with this subject:

“The Oil Arbitrage: Brent vs WTI”
“The Pricing of Commodity Options”

“Commodity Volatility Indices: OVX and GVZ”
“Commodities and Currencies: Inter – Market Analysis”

The HyperVolatility Forecast Service enables you to obtain statistical analysis and projections for three asset classes of your choice on a weekly foundation. Each member can choose up to three markets from the next listing: E-Mini S&P500 futures, WTI Crude Oil futures, Euro futures, VIX Index, Gold futures, DAX futures, Treasury Bond futures, German Bund futures, Japanese Yen futures and FTSE/MIB futures.

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