"To understand commodity futures prices, you need to understand the production and consumption of  the commodity in question."

Crude Oil is the raw material for all petroleum products, ranging from gasoline to lubricants. A typical 42 gallon barrel of Crude Oil is broken down into the following components: 19.5 gallons is used to produce gasoline, 9.2 gallons are used to produce distillate fuels (such as Heating Oil), 4.1 gallons goes for the production of kerosene jet fuel, and 2.3 gallons is used in the production of residual fuels. The remainder is primarily for chemical production and lubricants.

Based on the fact that Crude Oil and its products are so intertwined, the analysis of each is dependent upon which segment of the market is dominating demand at the moment: Gasoline , Heating Oil or Crude Oil.

Crude Oil Futures

Oil provides about 40 percent of the energy Americans consume and roughly 97 percent of our transportation fuels. Oil is at the crux of the modern economic system, and its importance should not be discounted. Besides meeting almost half of our total energy needs and the lion's share of America's transportation fuel needs, the oil industry employs almost one and a half million people in the United States. Not only is Oil, in one form or another, used to heat our homes and fuel our vehicles, petroleum-based products can be found in a variety of everyday household items, including deodorant, toothpaste, paints, balloons, perfumes and cosmetics.

Crude Oil in its raw form has to be refined to be used. Distillation is the primary method of refining Crude Oil into its resulting products. The Crude Oil is heated at the bottom of a tall metal tower. As Crude gets hotter, it turns to a gaseous state and the vapors rise. When the vapors rise, they cool. Each Crude Oil by-product, in its gaseous state, has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions, like fuel oils and diesel fuel, are taken from the bottom part of the heating tower. Lighter fractions, like butane, gasoline and kerosene, are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products, which are jet fuel, kerosene, motor gasoline, diesel fuel, residual fuel and distillate fuels. The major use of Crude Oil is for refining into its various products, such as gasoline and heating oil.

Heating Oil Futures

Distillation is the primary method of refining Crude Oil into Heating Oil. The Crude Oil is heated at the bottom of a tall, metal tower. As the Crude gets hotter, it turns to a gaseous state, the vapors rise. As the vapors rise, they cool. Each Crude Oil by-product, in its gaseous state, has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions like fuel oils, and diesel fuel are taken from the bottom part of the heating tower. Lighter fractions like butane, gasoline and kerosene are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products.

The six basic types of refined petroleum products are jet fuel, kerosene, motor gasoline, diesel fuel, residual fuel and distillate fuels. Heating Oil is the primary product of the distillate fuels, accounting for roughly 45 percent of the total distillate fuels. As the name implies, the major use of distillate fuels is used for primarily heating homes.

Unleaded Gas Futures

Distillation is the primary method of refining Crude Oil into Unleaded Gasoline. The Crude Oil is heated at the bottom of a tall metal tower. As the Crude gets hotter, it turns to a gaseous state and the vapors rise. As the vapors rise, they cool. Each Crude Oil by-product, in its gaseous state, has a specific cooling temperature, corresponding with a height of the tower. At these predetermined heights in the tower, pipes lead off to separate the various petroleum products. Heavier fractions like fuel oils, and diesel fuel, are taken from the bottom part of the heating tower. Lighter fractions, like butane, gasoline and kerosene are taken from the top of the tower. The heating tower produces the rough materials for the six basic categories of petroleum products.

Gasoline includes premium and regular grades, both leaded and unleaded, along with other refinery products. For over a decade, gasoline has been the largest petroleum product refined in the United States and the world. Three-quarters of the total usage of gasoline is by individuals, with demand ebbing and flowing with the driving habits.

DISCLAIMER:  Futures Trading involves a huge risk of financial loss!  FuturesKnowledge.com is a traders research and resource site - and is not meant to be used as a guide for trading.  Due to the large risk involved - we highly recommend that you consult with a number of different resources before attempting to invest in the futures, commodities, options, or any other market we report on.

Copyright © FuturesKnowledge, 2006.   All rights reserved.