What causes oil prices to fluctuate?


Oil is a commodity, and as such, he seeks to see larger price fluctuations than more stable investments, such as stocks and bonds. There are several influences on the price of oil, some of which we describe below.

The influence of OPEC on oil prices

OPEC, the Organization of countries-exporters of oil, is the main factor affecting fluctuations in oil prices. OPEC is a consortium of 14 countries: Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. OPEC controls 40% of the world’s oil supply. The consortium establishes production levels to meet global demand and can influence the price of oil and gas by increasing or decreasing production.

OPEC has promised to keep the price of oil above $100 a barrel in the foreseeable future, but in the middle of 2014, oil prices began to fall. It fell from a peak of above $100 per barrel to below $ 50 per barrel. OPEC was the main reason for cheap oil, as he refused to cut oil production, leading to falling prices.

Supply and demand, futures effects of the Treaty from oil prices

Like any commodity, stocks or bonds, the laws of supply and demand will provoke a rise in oil prices to change. When supply exceeds demand, prices fall and the opposite is also true when demand outstrips supply. 2014 the fall in oil prices include lower demand for oil in Europe and China, combined with a stable supply of oil from OPEC countries. The excess oil supply, oil prices will fall sharply. Oil prices fluctuated since that time, valued at approximately $67 per barrel as of April 2018.

While supply and demand affect the price of oil is actually oil futures that set the price of oil. A futures contract on oil is a legally binding contract that gives the buyer the right to buy a barrel of oil at a fixed price in the future. As stated in the contract, the buyer and seller of oil necessary to complete the transaction on a specific date.

The effects of natural disasters and the politics of oil prices

Natural disasters are another factor that can cause oil prices to fluctuate. For example, when hurricane Katrina struck the southern United States in 2005, affecting 19% of American oil supplies, the price for a barrel of oil will rise to $3. In may 2011, during a flood on the Mississippi river has also led to fluctuations in oil prices.

From the global point of view, political instability in the middle East, oil prices will fluctuate, as this region accounts for the lion’s share of the world’s oil supply. For example, in July 2008, the price of a barrel of oil reached 136 $because of the excitement and fears of consumers about the wars in Afghanistan and Iraq.

Production costs, the impact of storage on oil prices

Production costs may cause oil prices to rise or fall. While the oil in the middle East is relatively cheap to extract, oil in Canada, oil Sands Alberta is more expensive. Once the supply of cheap oil is exhausted, the price could go up if the only remaining oil in the oil Sands.

Made in the USA also directly affects the price of oil. With such a large overproduction in industry, the decline in production reduced the volume of supply and increasing prices. USA has an average daily production level of 9 million barrels of oil, and that conventional production, while volatile, began to decline. Consecutive weekly drop has put pressure on oil prices as a result.

There are also concerns that the storage of oil is running out, which affects the level of investment moving in the oil industry. Oil is diverted into storage has increased exponentially, and the key centers of their storage tanks filling quite quickly. Over 77% of the capacity is used in Cushing, Oklahoma. one of these centers. However, slowing production and modernization of the gas pipeline will reduce the likelihood that oil storage reaches its limits, which helps investors to shed their fears too many supplies and rising oil prices.

Interest affects the level of oil prices

While there are varying opinions, the reality is that oil prices and interest rates have some correlation between their movements, but are not correlated exclusively. The truth is, many factors influence the direction and interest rates, and oil prices. Sometimes these factors are related, sometimes they affect each other, and sometimes there is no rhyme or reason for what’s happening.

One of the main theories States that higher interest rates raise the costs of consumers and producers, which reduces the amount of time and money people spend driving. Less people on the road leads to a decrease in demand for oil, which could cause oil prices to fall. In this case, we would call this inverse correlation.

According to this theory, when interest rates fall, consumers and businesses to borrow and spend money more freely, which will lead to higher demand for oil. The more consumption of oil, which OPEC imposed restrictions on the volume of production, the more consumers bid up prices.

Another Economic theory suggests that rising or high interest rates contribute to the strengthening of the dollar against other currencies of the countries. When the dollar is strong, us oil companies will be able to buy more oil with each dollar spent, the US, ultimately passing the savings on to consumers. In addition, when the dollar is low against foreign currencies, the relative strength of the US dollars, so you buy less oil than before. This, of course, can help oil become more expensive for the USA, which consume nearly 25% of world oil reserves.

Bottom Line

There are several factors, both economic and political, which can cause fluctuations in oil prices. OPEC is widely regarded as the most influential player in the price fluctuations of oil, but the basic factors of supply and demand, production costs, political instability and even interest rates can play a significant role in the price of oil.

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