The Learn About Futures Insider for August 4, 2011 : Crude Oil

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Price highlights for this market include:

* When OPEC was formed in 1960, the price of oil was in the single digits.
* An oil embargo in the early 1970s helped push prices above $10 a barrel.
* Throughout the early 1980s, prices were supported above $30 and sometimes reached $40 a barrel as tensions played out between Iran and Iraq. Prices fell sharply in the middle of the decade due to an oil glut.
* The 1990 invasion of Kuwait and subsequent Gulf War send oil prices up over $40 a barrel to all time highs. The price spike is short lived as U.S. forces secure the area and oil supply lanes.
* A combination of an OPEC quota increase and the Asian Financial Crisis drive oil prices lower in 1998, eventually hitting a low just above $10 per barrel.
* Oil prices head higher from that low, eventually spiking over $37 following the events of September 11, 2001. The Iraq invasion in 2003 highlights the risk to Middle Eastern oil supplies and helps move oil prices back towards $40 a barrel.
* Hurricane Katrina spiked oil prices in 2005, with oil topping $70 a barrel.
* U.S. dollar weakness helps prices continue to move higher. Dips occur temporarily but geopolitical tensions thrust oil above $90 a barrel in 2007 and prices ride a wave of volatility above $100 to a high of $147.27 in the summer of 2008.
* Ebbing demand forecasts cause prices to retreat back towards a low near $30 a barrel but economic concerns and a continuing weakness in the U.S. dollar spur a recovery heading into 2009 and 2010.

Key terms for this market include:

Crack Spread – Based on the word cracking which is the word for breaking down crude oil into products at a refinery. A crack spread is a term used when referring to the price difference between crude oil and extracted products like gasoline or heating oil.

Light, sweet or sour crude oil – Oil comes in various colors and viscosities. Light, sweet crude oil has less sulfur and is lighter than sour crude oil. Light, sweet crude oil is usually in higher demand for refining into gasoline, kerosene and diesel.

Oil sands or tar sands – are semi-solids of crude oil, sand, and water. Usually sticky, sands need to be extracted in unconventional ways since they do not flow like those deposits used with well methods. Big deposits include Athabasca oil sands in Canada and Orinoco oil sands in Venezuela.

Key Uses

Crude oil is normally taken to refineries for the hydrocarbon chemicals to be distilled into the common products consumers are all familiar with or to be mixed with chemicals to create other products including:

Diesel fuel
Gasoline
Jet Fuel
Kerosene
Natural Gas
Lubricants
Tar
Paraffin

Key Concerns

Hubbert Peak Theory – A geologist working for Shell Oil in the middle part of the last century is widely recognized as the first person to predict an oil peak. M. King Hubbert noted that oil discoveries tended over time to form a bell shaped curve. He suggested that oil production over time would follow a similar path with production in the lower 48 states peaking between 1965 and 1970. Hubbert went on to predict global oil production would peak in the last five years of the 20th century.

Disclaimer: There is a substantial risk of loss in futures trading and it is not suitable for all investors. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some trading strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading.