Analysis on the Oil Price Mechanism

and its Fluctuation

Sinochem Petroleum Exploration & Production Co. Ltd.

Cui Jianjun

San Francisco, USA

Intercontinental Mark Hopkins
Hotel
Sep. 10th, 2007

SINOCHEM
1
Oil Price Mechanism

Analysis on the Oil Price Fluctuation

Conclusion

2
 Transformation of the
Oil Pricing Mechanism
Market Size &
Participants
1990s-now, standard oil price is
inducted by the derivative market

Financial In1980s,standard oil price Futures and

Institutes is determined by traders in Option
the spot market

1960s-1970s, major
participants of the oil Swap + OTC
market determine Option
long-term price
Traders
Forward
Contract

Trading Spot Market

between
Producers Supplier-
and Consumer
consumers

Time
Mutual Agreement
Independent Price Futures Market and
between Supplier
Assessment Standard Contract
and Consumer 3
 Historical Fluctuation of
the Oil Price
Oil price has experienced much more spikes and slumps, with
sharp fluctuation in its history. Jun-Jul,2007:$65-78
Jul-Aug,2006:$70-78
Aug-Sep,2005:$60-69
Oct-Nov,2004:$49-55
Jul-Aug,2003:$27-30

QCLc1, QLCOc1 2002-9-24 - 2007-7-26 (NY C)

Line, QCLc1, Last Trade(Last)

2007-7-12, 72.75 USD
Line, QLCOc1, Last Trade(Last)
Bbl
2007-7-12, 75.64
72

69

66

63

60

57

54

51

48

45

42

39

36

33

30

27

24
.12

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2002 2003 2004 2005 2006 2007

4

Before 1950s,the” 7 Oil
sisters” monopolize
the oil pricing
mechanism.
From 1960s to 1970s
and 1980s, the
monopoly was
gradually smashed up,
“Official Selling Price”
and ”Reference Price”
appeared. The changing
In 1978,the oil futures structure
market and its weighted inducts oil
average price became
barometer of the spot
market.
Nowadays, oil price
mainly follows the
futures price in NYMEX
and ICE.
Three Influencing Factors of
International Oil Price
The price fluctuation of
1 oil as a commodity,
The changing follows market law
supply-demand
structure
dominates oil
price
Monopoly brings both
profit and threat to the
3 “7Oil Sisters”.
Oil 2 Tempted by huge
profit, many oil
sales
Price The changing
companies rose.
Producers in Latin
price market America, Middle East
participants and Africa established
structure
“OPEC”, obtaining
guides oil price
much more say of
official pricing as their
“oil weapon”.
5
 The Oil Price Fluctuates
at High Level
Since 2003,oil price has almost Reuters 33 Institutes Forecast for WTI Yearly
kept spiking, hitting a record of Average Price ($/bbl）
$78.In 2006, the average price of 2007 2008 2010

DTD Brent is $65.14，a 20% High 70.2 75 72.3

increase of that in 2005. Low 56.5 50 43

Mean 62.78 61.22 53.60
The fundamentals such as supply-
demand balance support oil price at
a high level. Geopolitics,
changeable weather, and
speculating funds intensify price
fluctuation. In 2006, the price shock
exceeds $ 20/bbl.
It is forecasted that the oil price in
2H 2007 will remain high. (WTI
$65-75)，and will possibly break a
new record. In middle term, price
will come down but still at a
relatively high level.
6
 World Oil Demand
With rapid growth of global economy, world oil demand increases
steadily. According to IEA forecast, world energy demand will increase at
the highest speed in 2008.

7
 Figures of Major Oil Importers
According to “BP Energy Statistics 2007”, in 2006, America imports 671 million
tons of oil accounting for 25.9% of world total；Japan imports 257 million tons,
accounting for 9.9%;China imports 192 million tons accounting for 7.4%;China
exports 23.1 million tons of oil. The importing volume in other parts of the world
accounts for 57.8％.

Cr ude Crude Product

million tons Import Export Import Export
26. 01%
America 502.7 2.7 168.2 60.4
Amer i ca Canada 42.3 88.8 13.5 26.1
Chi na
Mexico - 97.5 20.1 6.9
Japan Mid-south
55. 65% Ot her Par t s America 33.7 116.9 24.0 63.8
7. 54%
Europe 533.6 29.2 131.4 75.9
10. 79%
former Sovie - 274.6 5.6 78.5
Middle East 10.1 884.6 7.3 116.7
North Africa 9.1 128.2 8.4 31.1
Pr oduct
West Africa 2.9 226.5 7.5 7.5
25. 57% Australia 25.1 6.6 13.9 4.1
China 145.8 9.6 45.9 13.5
6. 98% Amer i ca
Japan 208.6 - 48.4 5.5
Chi na Singapore 52.8 0.9 55.8 58.3
Japan Other parts in
60. 09% Asia-Pacific
Ot her Par t s Region 340.3 43.6 101.5 72.0
7. 36% World Total 1932.6 1932.6 657.8 657.8

8
 World Oil Reserves could Satisfy
Long-Term Demand
According to “BP Energy Statistics 2007”, world remaining proven reserves in 2006 is 1200.9 billions
barrels , an increase of 8% compared with 1114.7 billion barrels in 2000, and an increase of 15% in
1996.
Over decades, world oil reserve-production ratio is over 40 years，the remaining recoverable reserves
still could satisfy long-term supply-demand balance.
World oil and gas reserves are rich. Due to the hydrocarbon reserves analysis of USGS in 2000，world
ultimate recoverable reserves is 413.8 billion tons (not including 44.4 billion tons of NGL)，
conventional reserves increase is 94.2 billion tons，undiscovered conventional crude reserves is 100.3
billion tons.
It was said that human beings only have consumed 4500 billion barrels of crude oil, accounting for 18%
of the total reserves. With the current consuming level, world oil reserves could be used for 140 years
from now on. There is no need to worry about world crude reserves exhausting in the future decades.

World Conventional Hydrocarbon Reserves and Its Increase Potentials

Source: USGS, 2000.

Crude Crude Natural Natural NGL NGL

Category (kmm bbl) (kmm tons) Gas Gas (kmm bbl) (kmm tons)
4
(10 kmm (kmm tons)
3
m)
Undiscovered
Conventional Reserves 7320 1002.74 147.04 1186.3 2070 283.56
Conventional Reserves
Increase 6880 942.47 103.58 835.61 420 57.53
Remaining Reserves 8910 1220.55 135.64 1094.52 680 93.15
Cumulative Production 7100 972.61 49.58 400 70 9.59
Total 30210 4138.36 435.85 3516.44 3240 443.84 9
 The Oil Price Divorces
from Oil Producing Cost

Per barrel cost $10.95，

in which exploration Per barrel cost $11.92， Per barrel cost $9.87，in
$2.47，development in which exploration $3，
which exploration
$3.54，production $4.94 development $ 3.87, $1.93,development $4.40,
production $5.05 production $3.54
Per barrel cost $
3.96, in which
exploration Deep water in
North Sea Russia west Africa
$0.96,developme
nt $1.07, （UK, Norway） Per barrel cost $ 9.02,
production $1.93 Middle in which
Mexico
Europe exploration$1.50，
OPEC in OPEC in Gulf
Caspian Sea development $3.01
North Africa Middle East
production $4.51

Other OPEC Latin America

Members （Brazil, Columbia,
(onshore Bolivia） Per barrel cost $ 8.48,
oilfields) in which
Per barrel cost $ exploration$1.93，
4.93, in which Per barrel cost $ 9.02, development $3.01
exploration$0.96,de Per barrel cost $ 9.02,
in which exploration$1.50， production $3.54
velopment in which
development $3.01
$1.50,production exploration$1.50，
production $4.51
$2.47 development $3.01
production $4.51

10
 Oil Producing Cost

Producing
Operating Cost Capital Cost
Cost
Heavy Oil in Califonia 6－10 3－4 12
Heavy Oil in West Canada 7－10 3－4 13
Oil Sand in Alberta 9－12 3－5 15
Heavy Oil in Orinoco, Venezuela 8－10 5－7 15
Heavy Oil in Mexico 2 5－6 8
Mexican Gulf in America （water depth
4 4－6 9
more than 200m）
Brazil （water depth more than 200m） 4 3－5 8
Angola（Girassol Oilfield） 3 4 7
Alaska 4－-5 3－4 8
Low-production Well in America 12－24 2－3 20
Offshore oilfield in Malysia 5－6 8
North Sea （BP and other 7 oilfields） Average 4 3－4 8
Notes：Besides oilsand in Alberta and heavy oil in Orinoco，there is additional $2-3 of discovery cost.
Resource：Dr.Leonidas P. Drollas，(deputy director of GES and chief economist)，”We have plenty of Oil, only need more
investment”. 2006.1.25.
11
 Derivatives Trading
Pushing Up Oil Price
Based on recent years’ analysis, the long strength of oil funds in NYMEX is in
high positive correlation with WTI price trend.
The main cause of oil pricing hiking since 21st century is major banks, hedging
funds and other investment capital swarming into oil futures market. Oil futures
has already became a speculation tool. International oil price has seriously
divorced from supply-demand law.
NYMEX Option Position and WTI Oil Price

12
 Geopolitics Influencing Oil
Price in a Long-Term
Geopolitics has always been an important influencing factor of oil price. The
upheavals in Iran, Iraq etc. once drove oil price to great volatility.

Source: BP Energy Statistics 2007

13
 Conversion Rate for US Dollar
Influencing Oil Price
The depreciation of US dollar provides the thrust for oil price soaring up. After
remaining at $62-68 in the second quarter, crude price finally made a break
through, and climbed up steadily. Actually since June 14th, the US dollar effective
exchange rate index (EERI) has been declining from the high level of 83.27 to 80.

Many funds are

manipulating futures
market as a hedging tool
to tackle US dollar
depreciation. The net
long position keeps
increasing until making a
record of 127491 lots.

14
 Conclusion
With rapid development of global economy, world demand for
oil energy keeps rising, and oil exploration and production cost
increases accordingly. Moreover, the upheavals in main oil
producers and speculation funds in oil futures market drive
international oil price soaring up, which will affect the
sustainable development of world economy and petroleum
industry.

It is forecasted that the oil price will keep fluctuating at a

relatively high level, which requires profound study on the oil
price, and deep communication .

15
Thank You!

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