The main methods for producing petroleum products include atmospheric and vacuum distillation, catalytic cracking, hydrocracking, and catalytic reforming. Generally speaking, regardless of the specific processing technique used, the light components in crude oil are separated first—starting with petroleum gas and gasoline, followed by intermediate fractions such as kerosene and diesel, and finally heavier fractions like fuel oil and asphaltic materials.

Properties and Classification of Petroleum Products

Gasoline

Generally speaking, gasoline is classified into two grades based on the motor method octane rating: 70 and 85. Based on the research method octane rating, it is further divided into four grades: 90, 93, 95, and 97. Currently, in everyday life, the gasoline grades most commonly used are those classified according to the research method octane rating. Gasoline is typically used as fuel for gasoline-powered vehicles and gasoline engines. For automotive gasoline, different grades are selected depending on the engine's compression ratio: engines with higher compression ratios can use higher-grade gasoline, while engines with lower compression ratios should use lower-grade gasoline. Aviation gasoline, on the other hand, is usually used as fuel for piston-type aircraft engines. It is classified into three grades based on the research method octane rating: 75, 95, and 100. At present, it is used only in small aircraft, particularly military aircraft.

『 Kerosene 』

Kerosene was formerly known as lamp oil because, in the early days, it was primarily used for lighting. Kerosene is classified into three grades according to quality: premium grade, first-grade, and qualified grade. It is mainly used as fuel for lighting lamps, various types of blowtorches, gas lamps, vaporizers, and kerosene stoves. It can also serve as a detergent for mechanical parts, a solvent in the rubber and pharmaceutical industries, an ink thinner, and a feedstock for organic chemical cracking. Additionally, it is employed as process oil in industries such as glass and ceramic manufacturing, aluminum plate rolling, and chemical heat treatment of metal surfaces. Aviation kerosene, on the other hand, is primarily used as fuel for jet engines; currently, all large passenger aircraft use aviation kerosene. Aviation kerosene is divided into three grades: No. 1, No. 2, and No. 3, with only No. 3 aviation kerosene being widely used.

『 Light diesel and heavy diesel 』

Light diesel oil is classified into three grades according to quality: premium grade, first-grade, and qualified grade. It is further divided into six grades based on its pour point: No. 10, No. 0, No. -10, No. -20, No. -35, and No. -50. Light diesel oil of No. 10 grade has a pour point no higher than 10°C; the same applies to the other grades. Light diesel oil is used as fuel for diesel vehicles, tractors, and various high-speed (over 1,000 rpm) diesel engines. Depending on different temperatures, regions, and seasons, light diesel oil of different grades should be selected. In colder climates, light diesel oil with a lower pour point should be chosen; conversely, in warmer climates, light diesel oil with a higher pour point is recommended. Heavy diesel oil is used as fuel for medium- and low-speed (below 1,000 rpm) diesel engines. Generally, it is classified into three grades according to its pour point: No. 10, No. 20, and No. 30. The lower the engine speed, the higher the pour point of the heavy diesel oil that should be used.

Fuel oil

Fuel oil grades are primarily classified based on kinematic viscosity, with the commonly used unit for kinematic viscosity being centistokes. For example, if a fuel oil has a kinematic viscosity of 180 centistokes, we refer to it as “No. 180 fuel oil.” Based on their sulfur content, fuel oils can be divided into high-sulfur fuel oils and low-sulfur fuel oils. Currently, more than half of China’s fuel oil consumption relies on imports, and among imported fuel oils, 80% are No. 180 fuel oils.

In China, the primary uses of fuel oil are concentrated in sectors such as power generation, transportation, metallurgy, chemical industry, and light industry. According to statistics from the National Bureau of Statistics, the power sector accounts for the largest share of consumption, at 32% of the total; followed by the petrochemical industry, which mainly uses fuel oil as a raw material for fertilizers and as fuel for petrochemical enterprises, accounting for 25% of total consumption; next is the transportation sector, primarily as marine fuel, accounting for 22% of total consumption. In recent years, the sectors experiencing the fastest growth in demand have been the building materials and light industries (including manufacturers of flat glass, glassware, architectural and household ceramics, etc.), which account for 14% of total consumption.

Introduction to the Global Oil Pricing System

The Meanings of Several Prices in International Oil Trading

Official prices of the Organization of the Petroleum Exporting Countries

In the 1960s, in order to combat the practice of Western multinational corporations lowering “official prices,” OPEC began announcing standard crude oil prices at successive ministerial meetings, particularly from the late 1960s through the early 1970s. These standard crude oil prices were based on light crude oil with an API gravity of 34 in Saudi Arabia, and the announced prices served as the unified official prices prevailing at the time.

By the 1980s, due to the rise in oil production from non-OPEC countries, at the end of 1986, OPEC found that the "official price" had lost much of its effectiveness. Consequently, OPEC switched to using the average price of seven benchmark crude oils worldwide—the so-called "basket price"—as the basis for determining each member country's crude oil price. This basket price served as the reference price, and individual prices were then adjusted according to the quality of the crude oil and transportation costs.

The basket of crude oil prices, including seven types of crude oil, formulated by the OPEC Price Committee in November 1986, comprises:

Saudi Arabian Light Oil (ArabLight) API 34 $17.52/bbl

Algerian Sahara Blend API 44 $18.87/b

Indonesia Minas API 34 $17.56/b

Nigeria Bonny Light crude oil, API 37°, $18.92/bbl

UAE Dubai Oil (Dubai) API 32 $17.42/b

Venezuelan Tia Juana Light crude oil, API 31, $17.62/bbl

Mexico Isthmus light crude oil $18.07/b

Weighted average $18.00/b

Official prices of non-OPEC countries

This is an oil pricing system developed independently by oil-producing countries that are not members of OPEC. It generally references the OPEC pricing system and fluctuates up or down based on each country’s specific circumstances.

Spot market price

The world’s largest spot oil markets are located in New York, USA; London, UK; Rotterdam, Netherlands; and Singapore, Asia. Before the 1970s, these markets served merely as mechanisms for major oil companies to balance surpluses and deficits and exchange crude oil products among themselves. Spot oil trading volumes accounted for less than 5% of the world’s total oil trade, and spot prices generally reflected only the sales prices for overproduction under long-term contracts. Consequently, the spot oil market during this period was referred to as the “Residual Market.” Following the 1973 oil crisis, as spot trading volumes and their share in the global oil market gradually increased, the spot oil market evolved from a mere residual market into a marginal market that reflects the production costs, refining costs, and profit margins of crude oil. As a result, spot prices increasingly became an important basis for oil companies and governments of oil-consuming countries in formulating their petroleum policies. To break free from rigid pricing constraints, some long-term trade contracts began to link their prices to spot market rates. This practice of linking long-term contracts to spot market prices typically takes one of two forms: one involves negotiating and agreeing on prices on a weekly, monthly, or quarterly basis; the other involves calculating an average of spot prices (on a monthly, bi-weekly, or weekly basis) to determine the contract price.

There are two types of prices in the spot oil market: one is the actual spot transaction price, and the other is an estimated price level for certain market prices, derived by some institutions through research and monitoring of the market.

Futures trading price

The oil futures price is the price at which buyers and sellers, through open bidding on the oil futures market, reach a mutually agreed-upon deal on the “standard oil contract” for future delivery—in terms of price, quantity, and delivery location. To facilitate trading or increase market liquidity, the futures market sometimes also establishes a “settlement price” in accordance with specific rules. Typically, the settlement price for oil futures is the weighted average price over a given period. When conducting research, the “settlement price” is often used as a proxy for the futures price during that same period.

Judging from the fluctuations in crude oil prices over recent years, the futures market has, to some extent, replaced the spot market’s role in price discovery. As a result, futures prices have become a leading indicator of changes in national crude oil prices. The open auction trading mechanism employed by petroleum futures exchanges generates signals about future supply-and-demand dynamics. These exchanges promptly publish trading data worldwide, enabling petroleum traders to access price information at any time. All these factors have contributed to making petroleum futures prices the benchmark for the petroleum market. According to leading global oil price index providers such as Platts and Argus, the settlement price from the previous trading day on the petroleum futures exchange plays a critically important role in determining the levels of crude oil and refined product prices.

Barter price

When OPEC member countries export the crude oil they produce, they must adhere to the official prices jointly agreed upon among member states. However, due to differing national conditions, some member countries that are in urgent need of funds may seek to increase their oil production in order to replenish their supplies—yet they still have to comply with OPEC’s production quotas. To resolve this contradiction, some countries have adopted a barter system to exchange their desired goods and services. Although the crude oil price used in such transactions is calculated based on OPEC’s official price, since the value of the goods exchanged typically exceeds the general market price, the effective oil price in these barter deals often ends up being lower than the official price. Thus, in a weak market environment, this approach represents a more subtle method of offering price discounts and a clever trading tactic.

The most basic form of barter is exchanging oil for specifically designated goods or services. In addition, there are various other forms, such as using oil to settle debts, exchanging oil for oil, and repurchase transactions. A repurchase transaction involves the seller using part of the revenue generated from oil sales to purchase goods from the country that imported its oil. This type of transaction is relatively flexible: oil-exporting countries can choose from a wide range of goods and services offered by oil-importing countries, selecting those they are willing to accept as full or partial payment for their oil exports.

Netback price

Netback pricing, also known as net-back pricing, generally refers to the ex-ship price of crude oil calculated by taking the spot price of refined petroleum products in the consumer market, multiplying it by each product’s yield rate, and then deducting transportation costs, refinery processing fees, and refiners’ profits. The essence of this pricing system is that it shifts the entire risk of falling prices onto the side of crude oil sales, thereby safeguarding the interests of refiners. Consequently, this pricing model is particularly well-suited to situations where the crude oil market is relatively oversupplied. In 1985, Saudi Arabia adopted this pricing system precisely because the crude oil market at the time was experiencing an oversupply, enabling it to regain lost market share.

Price index

Information has become a strategic resource. Many renowned information agencies leverage their informational advantages to collect real-time oil transaction prices from around the world, thereby establishing authoritative quotations for specific oil products. Currently widely adopted quotation systems and price indices include Platt's, Petroleum Argus, Reuters Energy, Telerate of the Associated Press, the Asia Petroleum Price Index (APPI), the Indonesia Crude Price Index (ICP), the Far East Oil Price Index (FEOP), and RIM. Quotations in the spot crude oil market generally adopt the Free On Board (FOB) price, while some oil grades use the Cost, Insurance, and Freight (CIF) price.

Pricing Mechanism for International Crude Oil and Refined Oil Markets

Currently, the world’s major spot oil markets include five key regions: the Northwest European market, the Mediterranean market, the Caribbean market, the Singapore market, and the U.S. market. The Northwest European market is centered around the Amsterdam-Rotterdam-Antwerp region and primarily serves countries such as Germany, France, the United Kingdom, and the Netherlands, with Rotterdam serving as its core hub. Although the Singapore market has only emerged over the past decade or so, thanks to its strategically advantageous geographic location, it has developed extremely rapidly and has now become a major oil trading center for South and Southeast Asia. The United States consumes approximately 900 million tons of oil annually, accounting for about one-quarter of the global total; of this amount, roughly 600 million tons are imported. As a result, large-scale oil markets have formed in Houston, located along the Gulf of Mexico, as well as in Portland and New York ports on the Atlantic coast. Currently, China’s benchmark retail prices for refined petroleum products are set by referencing the prices from three international markets: Rotterdam, New York, and Singapore.

The major global oil futures markets include the New York Mercantile Exchange, the London International Petroleum Exchange, and, more recently over the past two years, the Tokyo Commodity Exchange. In 2003, the New York Mercantile Exchange’s energy futures and options trading volume exceeded 100 million contracts, accounting for 60% of the total volume across the three major energy exchanges. The West Texas Intermediate (WTI) crude oil traded on the NYMEX is the world’s most actively traded commodity futures contract and one of the most important pricing benchmarks in the global oil market. The Brent crude oil traded on the London International Petroleum Exchange is also among the world’s most significant pricing benchmarks; roughly 50% of global crude oil trade is priced with reference to Brent crude. Although Japan’s oil futures market has a relatively short history, its trading volume has been growing rapidly, and its influence in the region continues to strengthen.

The structure of the global oil market determines its pricing mechanism. Currently, international crude oil trade mostly uses benchmark crudes from various major regions as pricing references. The final settlement price for crude oil transactions is determined by adding a premium or discount to the spot or futures prices of the benchmark crude during a specific period around the delivery or bill-of-lading date. Among these, futures market prices play a pivotal role in international oil pricing. By geographic region, all crude oils produced in North America or destined for North America are priced based on WTI crude oil; crude oils shipped from the former Soviet Union, Africa, and the Middle East to Europe are priced using Brent crude oil as the benchmark; crude oils produced by Middle Eastern oil-producing countries or shipped from the Middle East to Asia were historically priced primarily using UAE Dubai crude oil as the benchmark; and in the Far East market, the primary reference crudes are Malaysia’s Tapis light crude and Indonesia’s Minas crude. For instance, the crude oil exported from Daqing, China, is priced based on Indonesia’s Minas crude oil.

This pricing system determines the differences in import costs of petroleum across various regions. According to expert statistics, from 1993 to 2001, the price of Saudi light crude oil sold to Northeast Asia was, on average, $1.01 per barrel higher than the price charged to Europe. The gap was even wider when compared to prices for the U.S. market—sometimes exceeding $3 per barrel. There have even been instances where it turned out to be cheaper to ship oil directly from Saudi Arabia to the United States and then re-export it to China, rather than purchasing it directly from Saudi Arabia and transporting it back home. This phenomenon is internationally known as the "Asia premium."

Finished petroleum products mainly include gasoline, kerosene, diesel oil, and fuel oil. Generally speaking, during the refining of crude oil, lighter components are always separated first. As one type of finished petroleum product, fuel oil is the heavier residual fraction obtained from crude oil after the separation of gas, kerosene, and diesel oil during the refining process.

Crude oil, as the world’s primary energy source today, is a commodity of strategic significance for all nations. After decades of development, the global crude oil trading market has established fairly well-defined rules of the game. Currently, crude oil traded in the international market is priced based on benchmark oils from major regions around the world. Divided into four key geographic regions, there are five main pricing formulas as follows:

1. West Texas Intermediate (WTI) crude oil—the benchmark crude for all crude oils produced in the United States or sold into the U.S. Its primary trading venue is the NYMEX exchange, where prices fluctuate constantly and trading activity is extremely high. In addition, over-the-counter trading is also available. The light, low-sulfur crude oil futures on the NYMEX currently rank as the most actively traded commodity futures contract in the world. Thanks to the contract’s excellent liquidity and high price transparency, the NYMEX light, low-sulfur crude oil futures price is widely regarded as one of the benchmark prices in the global oil market. Delivery for this futures contract takes place in Cushing, Oklahoma—a location that also serves as the delivery point for the U.S. spot oil market.

2. Brent crude oil from the UK North Sea. Approximately 80% of global crude oil traded worldwide uses Brent as the benchmark for pricing. The key regions that rely on Brent include: Northwest Europe, the North Sea, the Mediterranean, Africa, and certain Middle Eastern countries such as Yemen.

3. The sulfur-rich crude oil DUBAI from the United Arab Emirates serves as the benchmark crude for pricing both crude oils produced by Middle Eastern oil-producing countries and crude oils sold from the Middle East to Asia. Its primary trading method is over-the-counter trading or price differential trading against other standard crudes.

4. The Far East market is divided into two types:

Malaysian light crude oil TAPIS. It is the benchmark crude oil that typically represents the price of light crude oil in Southeast Asia, and most light crudes in Southeast Asia are priced relative to it. Its primary trading method involves trading based on price differentials against other standard oils.

The official ICP price for Indonesia. The primary crude oils priced in this manner include Indonesian crude oil as well as certain crude oils from some countries in the Far East region, such as Vietnam’s Bach Ho and China’s Daqing.

Relatively speaking, the international refined oil market has a shorter development history than the crude oil market, and its pricing mechanisms are less internationally standardized. Currently, there are three major refined oil markets worldwide: Rotterdam in the Netherlands in Europe, New York in the United States, and Singapore in Asia. In each of these regions, international trade in refined oils is primarily priced based on local market prices. As fuel oil is a downstream product of crude oil, its price trend exhibits a strong correlation with that of crude oil. We conducted a correlation analysis on the price trends of WTI crude oil futures on the New York Mercantile Exchange and 180CST high-sulfur fuel oil spot prices in the Singapore fuel oil market from 2001 to 2003. The results showed that the price correlation between the two reached as high as 94.09%.

As the global oil market has developed and evolved, many long-term crude oil trading contracts now employ a formula-based pricing method. This method selects the price of one or more benchmark crudes as the base price and then adds or subtracts a premium or discount. The basic formula is: P = A + D, where: P represents the settled price of crude oil, A is the benchmark price, and D is the premium or discount.
 

The reference price in question is not the specific transaction price of a particular crude oil at a given moment, but rather a price calculated by linking to spot prices, futures prices, or quotations from a certain quoting agency over a period before and after the actual transaction. For some crude oils, the benchmark price is derived from the quotation for that particular crude oil within a specific quoting system, after being processed through a formula. For other crude oils, however, since no such quotation is available, their prices are linked to those of other crude oils instead.

The crude oil grade used as a reference for pricing is called the benchmark oil. The specific benchmark oil chosen varies depending on the trading region. For exports to Europe or from Europe, Brent crude is typically selected; in North America, West Texas Intermediate (WTI) is the primary benchmark. When exporting to Europe from the Middle East, Brent crude is used as the benchmark; when exporting to North America, WTI is the benchmark; and when exporting to the Far East, Oman and Dubai crude oils are used as benchmarks. In the Middle East and the Asia-Pacific region, "benchmark oil" is often combined with a "price index," and both the benchmark oil and the price index are given great importance, with particular attention paid to premium and discount adjustments.

(1) European crude oil.

In Europe, the North Sea Brent crude oil market developed relatively early and is well-established. The Brent crude oil market features both a spot market and a futures market. This region’s market is highly mature; British North Sea light crude oil Brent has become the benchmark for crude oil trading and exports to the region—essentially, most traded crude oils are priced based on Brent crude oil. The key regions involved include Northwest Europe, the North Sea, the Mediterranean, Africa, and certain Middle Eastern countries such as Yemen. The primary trading venue is the IPE exchange, where prices fluctuate constantly and trading activity is extremely vigorous. In addition, other derivatives are traded over-the-counter.

The spot prices of Brent crude oil can be categorized into two types: the Dated Brent spot price and the 15-day Brent spot price. The former refers to the price for a specific shipment within a designated time frame; the latter refers to the price for a shipment with a specified delivery month but an unspecified exact delivery date, with the seller required to notify the buyer of the precise delivery date at least 15 days in advance. In long-term contracts, the following major crude oils are priced by reference to the Dated Brent crude oil price (Dated Brent plus a premium):

1. Algerian Sahara blended oil.

2 Libyan crude oils: An-Na oil, Butoifel oil, Brega oil, Sidir oil, Serir oil, Sirtega oil, and Zuwetina oil.

3 Nigerian Bonny Light Oil, Bonny Medium Oil, Brass River Crude Oil, Escravos Crude Oil, Forcados Crude Oil, Pennington Crude Oil, and Ibodo Crude Oil.

4. Saudi Arabia exports Arab Light crude oil, Arab Medium crude oil, Arab Heavy crude oil, and Berri Extra Light crude oil to Europe.