Being the most used energy source, crude oil plays a vital role in daily lives as well as in the economic and social development. A slight movement in the price of this commodity affects the entire market network. But what are the factors that move its price?

 

Of all sectors in the world, the oil industry affects most countries in a most comprehensive manner. It is a versatile commodity, its byproducts being used as inputs for various sectors. The value of the commodity can be gauged from the fact its availability and trading goes on impacting international relations.

 

The price of crude oil depends upon its type and quality. Once distilled, heavy and light crude oils yield several refined products. Heavy crude oils are used to make marine fuels, while light crude oil are refined into various petroleum products such as aviation fuel, gasoline (petrol), kerosene, naphtha, petroleum ether and petroleum spirit.

 

Sour and sweet crude are also priced differently. West Texas Intermediate (WTI) is a high-quality crude oil which is valued for the fact that higher and better gasoline can be refined from it than from most other types of oils. Brent Blend is a combination of different oils from 15 fields throughout the Scottish Brent and Ninian systems located in the North Sea. Both these crudes are sweet in nature. 

 

Another crude, the Opec (Organization of Petroleum Exporting Countries) Basket oil, is a collection of seven different crude oils from Algeria, Saudi Arabia, Indonesia, Nigeria, Dubai, Venezuela and the Mexican Isthmus. Containing a higher percentage of sulfur within its natural make-up, it is not as ‘sweet’ as WTI or even Brent Blend. WTI is generally priced at about a $2-4 per-barrel more than Opec Basket price and about $1-2 per barrel more than Brent, although on a daily basis the pricing relationships between these can vary greatly. 

 

Crude is an exchange-based commodity and is traded on a per-barrel basis. Universally, the NYMEX futures price for crude oil—which is WTI—is mostly used as a standard benchmark for quoting. However, Brent crude is also very popular in exchanges. 

 

As crude oil market is in a tight balance, and with increasing demand in emerging markets and dwindling sources of new supplies, the price may remain firm in the long term. This makes it a good investment in the long run.

 

 

Being the most used energy source, crude plays a vital role in daily lives as well as in the economic and social development. A slight movement in the price of this commodity affects the entire market network. Therefore, it is necessary for traders and even the non-traders to know what all leads to the price movement of the commodity. 

 

The price of crude is a function of various elements. DK Aggarwal, Chairman & Managing Director, SMC Investments & Advisors Ltd, says, “Crude price outlook broadly depends upon the demand and supply factors. The supply side of Opec, Non Opec countries and their announcements have given significant impact on the prices, hence one should keep a tight vigil on the outcome of event of these organization.” 

 

Apart from the inherent demand and supply fundamentals, crude prices are also majorly influenced by the economic growth of major consuming countries, news and expectations related to Opec’s supply capacity, the currency movement, inventory data from the US Energy Department, geopolitical scenario in the oil producing countries, etc., says Naveen Mathur Associate Director (Commodities & Currencies), Angel Broking. He also recommends close watch on weather conditions and hurricane season as these factors affect the short-term demand supply scenario of crude oil. 

 

“As the WTI and Brent crude oil are traded in US dollar, the movement in currencies also affects the prices,” says Harish Galipelli, Product Head, Commodities and Currency Derivatives, JRG Securities Ltd. “Depreciation in US dollar may lead to an upward movement in oil prices and vice versa.” The factors influencing the oil price movement are as follows:

 

 

As for any other product, the demand-supply imbalance affects prices. On the consumption front, the US accounts for 37 per cent share of the global crude demand, followed by China (18 per cent) and Japan (9 per cent). On the supply front, Saudi Arabia accounts for 23 per cent share, followed by the US (18 per cent) and Iran (10 per cent). The variables which result in imbalance between demand and supply include:

 

Economic growth: It is directly related to the price of oil. When the economy grows, oil demand increases, and vice-versa. 

 

Opec’s production and supply: Opec comprises 11 countries with high reserves and production capacity. The non-Opec suppliers represent 60 per cent of the world’s oil supply but have virtually no spare capacity. They, therefore, respond to market prices rather than attempting to manipulate them. But Opec does manipulate prices. Hence any disruption in production anywhere in the world generally has the effect on increasing oil supplies.

 

Policy of Opec: As the world’s largest oil producers and reserves, the Opec’s announcement to increase or lower the production level unavoidably triggers the oil price. 

 

Inventory of major consumers: Typically, each country has to reserve oil for energy stability and security. Insufficient oil inventories cause supply shortage and jacks up prices. So, the inventory reports of large consumers such as the US or European countries affect prices.

Weather: In winters, the demand of heating oil (mainly diesel and fuel oil) is higher than other types of oil. Meanwhile, in summers, the demand of gasoline is higher than other types. As a result, the price of oil tends to increase during the respective period.  

 

 

Concern and worry can affect the price movement (as of other commodities) of oil, even if the production and export volumes remain unchanged. The sentiments of oil traders are a key to drive oil prices; they quickly respond to news and even rumors. Hence, the regional or global influential news reports or announcement can make a quick difference in prices. The political and economy developments in any region can impact global oil prices. In an extraordinary situation like war, the prices could be volatile. 

 

 

Oil brokers don’t just sell physical oil in the spot market but also trade it through exchanges. The  price discovered at exchanges reflect the risk assessment of investors, speculators, traders and hedgers in the market. The participants factor in a wide array of potential impacts on the supply and demand for energy within the economy. To trade oil products in the market, apart from monitoring news and movement according to fundamental factors of oil market, the participants play with their analysis. These analyses are based on information, statistic and the price record or history of oil products to determine the price of today. To determine this, analysts use various tools of technical analysis. All these give the price a direction. Moreover, the impact is greater in the future market which has a trading volume larger than the existing one.  

 

 

Foreign exchange: Oil is traded internationally and sold in the US dollar. Therefore, the value change of foreign currency, when compared with the US dollar, affects the price of oil. When the US dollar devalues, the price of imported crude and finished products will be cheaper when calculated in local currency. Conversely, the price, when calculated in the US dollar, will be higher. The stronger US dollar also results in lower oil price. Furthermore, the fluctuation of foreign exchange makes it more difficult for traders to compare the price of oil in each market.

 

Disasters: Natural and manmade disasters can drive up oil prices if they are big enough. Hurricane Katrina in 2005, Mississippi River flooding, in May 2011 and the BP oil spills are some of the examples. However, these disaster may not make matter much if demand is low.

 

Alternative energy: Many experts believe that the discovery of and technological development to exploit other alternative energy sources such as natural gas, coal and nuclear energy at competitive prices will decrease the demand and price of oil.