The water is boiling

So we can see then that the price of oil is rising, and its rising very fast. The idea behind my title is the old wives tale about a frog in a pot of boiling water. If you put him in when the water is cold, he won't notice the slow steady rise in temperature and will cook. If you toss him in a pot of boiling water he'll jump out.

So anyway the prices are high, the water is starting to get very hot. Will we jump out or will this frog get cooked?

And what do all the numbers and information mean? Why do I care about the price of oil?

The prices shown on the previous graphs are the front month prices for West Texas Intermediate crude. This an oil that is known as a benchmark crude. Brent crude oil is another and is also traded on the NYMEX. Brent crude comes from the North Sea, and import source of oil for the UK, while WTI obviously comes from Texas. Both oils are what are commonly refered to as "Light Sweet" crude oils. What does that mean?

The oil that comes from the ground is found in many parts of the world, at different depths and in different conditions. Crude oil is made of many different components mixed together (in much the same way that sunlight is made of many different colors of light mixed together). Typical Crude oil contains a spectrum of products, from heavy think tar, to lighter more fluid kerosene and diesel fuels, all the way to lighter products that may be a gas at room temperature and pressure.

Here is a resource that helps explain things in a more visual way.
http://www.energy.ca.gov/gasoline/whats_in_barrel_oil.html

The relative amount of these products is important to the value of the crude oil. If the oil conatins mostly heavy products like tar - it will be less valuable. Lighter crude therefore = higher value. Lighter crude is easier to turn into the sought after products like diesel and gasoline and that why is more valuable.

So what does "sweet" mean? Whos tasting this stuff? Well in oil terms sweet or sour has nothing to do with taste. Sour crude contains toxic hydrogen sulphide, sweet crude does not. This makes sweet crude the prefered choice because its cheaper to handle and refine. So you can see now that light sweet crude is a double whammy of refining perfection - great for turning into motor fuels at the lowest possible cost. And thats why they are used for benchmarking - because they tend to influence the price of motor fuel. It is of course possible to buy heavy crude, or sour crude - obviously at lower prices.

What does the front month mean?
Well when you buy oil, its not like buying potato chips at Walmart. You dont place an order and recieve the oil the same day. There are logistics involved and there are also minimums - in the case of oil - 1000 barrels! So the current price reflects the cost if you were to order a delivery of oil at the earliest possible time - usually taking about a month to be delivered. Thats why its called the "front month". Alternativley you can order oil for delivery at some date in the future, which is how the commodities get their name for example "oil futures", or the "futures market".

Why would anyone delay delivery like that?
That can be the subject of another post.