Commodity Investing: Maximizing Returns through Fundamental Analysis

CHAPTER 4

Crude Oil

Crude oil, also known as petroleum, was formed millions of years ago by the remains of plants and animals that inhabited the seas. It is thought that the majority of these organisms were single-celled and as they died their remains fell to the sea bed and were covered with sand and mud creating a rich organic layer. This process repeated itself over and over and the layers eventually developed into sedimentary rock. Over time increased pressure and heat from the weight of the layers caused the organic remains to slowly transform themselves into crude oil and natural gas, among other things.

Crude oil is made up of hydrocarbons, which are molecules made from both hydrogen and carbon atoms. These hydrocarbons are the basis of all petroleum, but they differ in their configurations of both hydrogen and carbon atoms. The carbon atoms may be linked in a chain formation with either a full or partial balance of hydrogen atoms. An important characteristic of hydrocarbons is that each chemical compound has its own boiling point. If you took a pot of water and boiled it to 212°F, all the water would boil off because this is the temperature at which the chemical compound of water, H₂O, boils. If you took a pot of crude oil and heated it to a 150°F boil you would notice that after some time the crude stops boiling. Raise the temperature to 200°F and the crude will boil again but eventually it would stop. You could repeat this process over and over by raising the temperature. ...