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Global oil price fluctuations can significantly impact the economy, energy costs, stock markets, investments, geopolitical stability, and environmental concerns. Fluctuations in oil prices can directly impact the profitability of oil companies and related industries, making it crucial for investors to monitor them.
In our article, we will discuss the top factors that affect the price of oil.
Factors affecting the price of oil
Supply and demand
When demand for oil exceeds supply, prices tend to rise. On the other hand, oversupply can lead to price declines. Factors influencing supply include production levels, exploration, drilling activity, oil-producing regions disruptions, and oil inventory changes. Demand factors include global economic growth, transportation needs, industrial activity, and consumer behavior.
For instance, the COVID-19 pandemic 2020 caused a significant decrease in global oil demand due to lockdowns and reduced travel, leading to a sharp decline in oil prices.
OPEC and OPEC+ countries
The Organization of the Petroleum Exporting Countries (OPEC) member countries coordinate production levels to manage global oil supply and stabilize prices. Their decisions, such as production cuts or increases, can have a significant impact on oil prices. Additionally, OPEC+ countries (the non-OPEC countries exporting crude oil), like the United States and Russia, contribute to global oil supply and influence market prices as well.
In the last few years, OPEC, along with several non-OPEC countries like Russia, have implemented production cuts to reduce global oil supply and stabilize prices. This decision brings a notable impact on oil prices, as the coordinated production cuts help balance the market and support a price recovery.
Note: Although OPECs discussions can potentially affect oil prices, they aren’t the main driving factor. Please consider all factors when making trades on oil prices.
Geopolitical decisions
Geopolitical events and decisions can disrupt oil supply and impact prices. Political instability, conflicts, sanctions, and trade disputes in major oil-producing regions, such as the Middle East, can create supply disruptions or uncertainties, leading to price volatility. Geopolitical decisions, including production agreements, trade policies, and strategic reserves releases, can also affect oil prices positively or negatively.
The imposition of economic sanctions on major oil-producing countries, such as Iran or Venezuela, can disrupt their oil exports, reducing global supply and driving up prices. For example, when the United States imposed sanctions on Iran’s oil industry in 2018, it led to a decrease in Iranian oil exports and contributed to a rise in oil prices.
**Past performance is not a reliable indicator of future performance.
Currency exchange rates
Oil prices are denominated in US dollars, so fluctuations in currency exchange rates can affect its cost in other currencies. When the US dollar strengthens, the price of oil may appear lower in other currencies, stimulating demand and decreasing oil’s global price. Conversely, a weaker dollar can make oil more expensive in other currencies, potentially dampening demand.
Seasonal factors
Seasonal variations can influence oil prices positively or negatively as well. For example, during the summer driving season in the United States, which typically starts around Memorial Day, there is increased demand for gasoline as people travel more. This increased demand for gasoline can push up oil prices as refineries strive to meet the demand. Additionally, factors like extreme weather events and the demand for heating oil during winter can affect oil prices in specific regions like Japan.
Exogenous shocks
Unforeseen events, often referred to as exogenous shocks, can significantly impact oil prices. These shocks include natural disasters (e.g., hurricanes), geopolitical tensions, terrorist attacks, and unexpected disruptions in oil production or transportation infrastructure. Such events can create sudden supply disruptions or increase market uncertainty, leading to price spikes.
For example, in 2017, Hurricane Harvey struck the Gulf Coast of the United States, causing severe disruptions to oil refineries and production facilities. The hurricane led to a temporary reduction in oil supply, resulting in price increases as markets reacted to the supply disruption and uncertainties surrounding the recovery efforts.
Alternative energy sources
The availability and adoption of alternative energy sources, such as renewable energy and electric vehicles (EV), can influence oil demand and prices. As the world transitions to cleaner and more sustainable energy systems, reduced dependence on oil can impact its long-term pricing dynamics.
For instance, as the EV market expands and more consumers switch to electric cars, the demand for gasoline could decline, leading to reduced oil demand and potentially putting downward pressure on oil prices.
Global economic performance
Global economic performance directly impacts oil prices. During periods of robust economic growth, industries expand, leading to increased energy consumption and higher demand for oil and vice versa. This elevated demand outpaces supply, causing oil prices to rise and vice versa.
For example, the global financial crisis in 2008-2009 resulted in a sharp decline in economic activity and a significant drop in oil prices. The contraction in industries and reduced consumer spending led to a substantial decrease in oil demand. Similarly, the COVID-19 pandemic in 2020 caused widespread economic disruptions, resulting in a dramatic decrease in global oil demand and a subsequent collapse in oil prices.
**Past performance is not a reliable indicator of future performance.
Future supply of oil
Future supply projections have a direct impact on oil prices as well. Anticipated increases in oil supply can exert downward pressure on prices, as expectations of a surplus in the market lead to reduced price sentiment as countries decrease their imports and consumers decrease their oil usage for the moment until prices are decreased in the future, and vice versa. Geopolitical tensions, conflicts in oil-producing regions, or disruptions in oil infrastructure can create concerns about future supply availability, resulting in speculative buying and upward price pressure.
For instance, the reimposition of US sanctions on Iran in 2018 raised concerns about reduced supply, leading to expectations of a tighter market and subsequent price increases.
The influence on oil prices concluded
Understanding the above-discussed interdependent factors is crucial for accurately assessing and predicting oil price movements, enabling businesses, investors, and policymakers to make informed decisions in an ever-evolving global energy landscape.
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