What determines oil prices?

a33Commonly referred to as “black gold”, crude oil plays a big role in the global economy. Being the most traded commodity worldwide, all stakeholders are always on the lookout for global oil prices and their future trends as they always have an impact on the economic landscape.

It is interesting to note that oil prices are so sensitive that they fluctuate depending on policy changes, news cycles and changes in the world markets. Oil prices have risen significantly over the past decade but saw a downward spiral in 2014 after steadying for about four years with oil trading at roughly $105 a barrel.

There’s more to oil prices than what meets the eye. Take a look at the factors that affect oil prices:

Demand

The rapid growth of industries and economic growth tends to increase the demand for oil. Countries such as China, Saudi Arabia and India are among the nations that have had an enormous demand for oil over the past few years.

Only recently, China surpassed the US as the largest importer of petroleum worldwide. Factors such as transportation, seasonal changes and population growth dictate the demand for oil. The demand curve also changes in countries that experience winter as the heating requirements increase during this period.

Supply

The Organization of Petroleum Exporting Countries, OPEC, is said to control 81% of the world’s crude oil reserves. This makes the 12 countries a huge determiner of the commodity on the trading floors. And while this is the case, the OPECs grip on the market is inclined towards the Canada and the US.

Geopolitical developments affect the policies of these member countries. Policies touching on political instability, or that some of the countries are at odds with the West especially concerning compliance with international rules, laws and regulations creates problems. As such, these political actions have triggered disruptions in the supply causing the oil prices to shift.

Derivatives and reports

Some market participants such as airlines collaborate with oil producers to exchange oil in contracts. The buying and selling of oil in futures and options, but not in its physical form, drives the prices downwards or upwards.

Reports produced from influential entities often play a significant role in determining oil prices. Examples of such reports include OPECs monthly report, National Bureau of Statistics in China and the US Energy Information Administration.

To sum it up, global oil prices and their future is unpredictable. However, one thing is for sure; oil is the engine of the world economy even if the search for alternative fuels gaining momentum.