The Top Factors That Affect Oil Prices
By Alex Marvin, editor, RigJobs.com
Commodity markets, particularly energy ones, occupy a special position in the list of the commodity trading tools. This is due to the crucial importance of energy in our lives and the geographic market area as well.
Although oil is provided by a limited number of countries, it is consumed everywhere: you hardly find such a place on our planet where people don't use oil and energy overall like gas or the products made from crude oil. So that means that crude oil remains an incredibly valuable natural source in the world and, thus, oil prices can change every day and even every minute. By knowing the main trends of changing oil prices, experienced traders could easily capitalize on the strengthening or weakening of the commodity position.
But what determines oil prices? Actually, there are several drivers that strongly affect the pricing of petroleum products and crude oil.
Geopolitical Factor
Everyone who wants to predict the oil price movement should monitor military action in the main oil-producing regions of the world because geopolitics is traditionally known as one of the major factors in the oil price. For example, most of the world's biggest oil fields are located in the Middle East and this region of global importance represents 65% of world oil reserves. More than 3 billion barrels of crude oil are supplied worldwide from this oil-producing region every year. That's why any conflict in the Middle East definitely influences the prices for oil products. Wars and minor skirmishes can immediately increase the oil prices because under such conditions it's getting harder and more dangerous to transport commodities. And let's not forget that there can be multiple oil production facilities in one area and in view of this fact the price can also rise considerably.
OPEC Production Quotas
OPEC (the Organization of Petroleum Exporting Countries) is a group that includes the world's largest oil-exporting countries. This organization aims to control and regulate the supply of oil worldwide as well as set the oil prices on the global market. 14 nations (the members of OPEC) that export oil in different parts of the world meet several times a year (usually two times – in autumn and spring-summer) and decide how much crude oil need to be produced daily. OPEC provides production quotas and carries out appropriate adjustments. In such a way, everyone can easily track the amount of oil that reaches the market.
Demand For Oil Products
The factor that has the greatest effect on the oil prices is demand. When the oil is actively produced and at the same time it is actively consumed, that means that there is the demand for this product and the level of prices remains unaltered at this point or will be increased if it achieves prudent deficit levels. On the other hand, a lack of demand for crude oil or oil products can trigger a downward price trend. You can easily monitor the level of demand for oil using the OPEC or Baker & Hughes reports.
Crude Oil Reserves
There is one more essential factor, it is a crude oil supply (EIA). That is clear enough – the smaller the remaining oil reserves, the higher will be the price of oil. And conversely, the larger oil reserves will cause a drop in the price of oil. But the most interesting thing about this situation is that if the levels of demand for oil and its supply are about the same, the oil price will gradually go down.
IMO 2020 Global Sulfur Limit
The International Maritime Organization announced an updated set of rules in 2016 that should have been implemented by 2020. According to these rules, the content of sulfur in "all marine fuels" should be decreased from 3.5% to 0.5%. Not all the refineries were ready and capable to introduce these reforms in the course of oil production. This fact can also cause a dramatic change in oil demand.
Climate Conditions and Emergencies
As you probably know, problems of a varied nature reflect adversely on the oil prices in the global market and the climatic features, weather and emergencies are not the exceptions. Earthquakes, hurricanes and other disasters occur all the time all over the world, including oil-producing regions. Such emergency situations surely lead to a slowdown of oil delivery, lower oil production and other problems in the oil market. As a result of all these complexities in oil-producing areas, the price of "black gold" can be expected to grow significantly.
Number Of Drilling Rigs
Since American shale-oil company Baker & Hughes has become an active participant in the world oil market, statistics on the number of its oil derricks plays a significant role in oil pricing. The generally accepted view that when the company establishes a certain number of oil-mining units, the maximum amount of oil extraction will be finally reached and it will follow the decreasing oil prices in the world oil market. All the necessary data can be found on the company's website.
Energy Alternatives
The popularity and use of renewable energy sources like solar and wind can result in a reduction in the world's dependency on oil. Besides, you can see more and more electric cars on the streets. A lot of countries support a considerable growth in the number of environmentally friendly non-oil cars and even ban the manufacture of new petrol and diesel cars in the coming years. This can cause the oil prices to fall in the near future because supply may remain high.
The Bottom Line
It's difficult to imagine the world's economy without crude oil. Even today, when people look for alternative energy sources and try to adjust them for everyday life, oil production remains the strategically important realm. Moreover, the actual behavior of the oil prices in the market seems fairly reasonable if all the factors listed above are taken into account.