The Factors Involved in Determining Oil Prices

Oil is one of the most relevant commodities in the world. The global economy has been affected by it more and more each year.

Oil has only been significant in the recent century. Before that, it was water and salt that was the treasured commodity. This was understandable as oil had no particular use yet except for oil lamps and kerosene. And only in 1857, in Romania, did the first commercial oil well was drilled. After almost a half century later, mass production was achieved in southern Texas. At the same time, oil has finally replaced coal as the primary source of fuel in the world.

Being a commodity, oil has come a long way. Its prices fluctuate as much as any commodity depending on a slew of factors. Knowing the determinants of oil prices is necessary information for those who want to trade and invest in this popular commodity.

Oil Supply and Demand

A balance in supply in demand is what global oil inventories aim for. Depending on the production, supplies may significantly exceed demands. In this case, the excess oil is stored. On the other hand, supplies may not be enough to cater to the demand if consumption goes beyond the target level. If this is the case, inventories may be accessed. Prices fluctuate accordingly. More supply lessens the price while more demand increases it.

The Organization of Petroleum Exporting Countries

OPEC or the Organization of Petroleum Exporting Countries is a group of countries that is responsible for 40% of the world’s oil production. Currently, it has 13 members namely Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. It is the largest entity to influence the oil supply of the world. OPEC has the power to affect fuel prices due to their ability to increase or decrease oil production.

Geographical Situation

The situation in an oil producing country is a prime factor in the pricing of oil. If a country is politically unstable, the basic move for supplier markets is to hike oil prices to cater to the highest bidder.

Atmospheric Conditions

The weather in a country can significantly affect the prices of commodities. Seasonal changes, natural disasters, and other weather actually influence oil prices. For example, summer induces more use for gasoline. Meanwhile, heating oil demand spikes during winter. These seasonal changes are more of a constant so oil producers adapt accordingly. However, for extreme weather conditions such as typhoons, and hurricanes which are unexpected, oil producers must adjust to the increase or decrease in demand or supply.

The Dollar

The value of dollar has an impact on oil prices because oil is traded and sold internationally in US dollars. In general, when the dollar depreciates, oil prices hike because demand for oil increases. Meanwhile, the appreciation of the dollar generally pulls down the demand and thus the price of oil due to the reduction of real income in the consumer countries.

There are quite a few more factors that influence oil prices such as the mood of the financial markets, the production, and speculative buying. It is important that anyone who wants to trade or invest in oil must understand the factors that determine oil prices for them to be able to act accordingly.