Prices for Oil are extremely volatile and fluctuate each and every second. What causes the crude prices to change so frequently and constantly? We will uncover the answers to this question in this discussion. To begin, let us understand why crude oil is so expensive or what all factors determine or derive the prices of crude oil.
What factors lead to determining crude prices?
Demand for Oil
1. Fuel Needs – More demand for a commodity leads to a higher price for that commodity. The summer season driving generally leads to an incremental demand for fuel which pushes the crude price upwards. An opposite trend is prevalent in winters as far as driving demand is concerned.
2. Heating Needs – Crude is also a basic source to meet the heating requirements during the winter season. Therefore its demand to meet the heating needs is increased in the winter season pushing the prices upwards.
3. World Economy – A great deal of crude oil goes into fuelling requirements for many industries (both for running the industries as well as the transportation of raw materials and finished goods) around the world. As a robust world economy would mean greater demand for crude and vice versa.
4. Commodity Exchanges – As crude is traded as a commodity on the futures exchange, the speculative trends are responsible for the increase and decrease of crude oil pricing.
Supply for Oil
1. Supplier Groups – Organization of the Petroleum Exporting Countries (OPEC) is a supplier group that controls 46% of the world’s supply of the crude. These groups based out of various different factors can decide to increase or decrease the supply application of crude oil, directly affecting the prices in the international markets. OPEC member countries were quick to realize their control of a major chunk of the world’s oil economy; If they compete against each other, their net realizations will be extremely low. Instead, they decided to form a cartel that makes joint decisions regarding the control of oil supply and prices.
2. War Situation – As production of crude oil is limited to a geographical region, any unrest in these areas can limit the crude supply in the world market leading to an instant rise in oil prices. The world witnessed this phenomenon at the time of Gulf war when the oil prices went sky high. In recent history, we watched prices take a record-breaking nose dive during the Covid-19 pandemic.
3. Bilateral Treaties – Bilateral treaties between two countries concerning supply of oil can also control oil prices and its supply.