Important factors causing oil price fluctuations
World oil exchanges play a critical role in the global economy, determining the price of one of the most sought after commodities - oil.
The largest of them are the New York Mercantile Exchange (NYMEX), the London Intercontinental Exchange (ICE) and the Singapore Mercantile Exchange (SGX).
These organizations serve as the main venues for trading oil, and set its prices, which are then used throughout the world.
Oil pricing is a complex process that depends on many factors that have a cumulative impact on the cost of energy resources.
What affects the price of oil on world exchanges
The price of oil on world exchanges is influenced by the following factors:
- Supply and Demand : An increase in global demand for oil or a decrease in its supply leads to an increase in prices.
- Geopolitical situation : Military conflicts, political instability in oil-producing countries cause prices to rise.
- Macroeconomic indicators : Inflation, changes in exchange rates, economic growth or recession also affect the price of oil.
- Weather conditions : For example, hurricanes can cause the closure of oil production platforms, which reduces the supply of oil in the market and increases prices.
Main factors influencing the price of oil
The world economy depends on the price of oil. This important resource plays a key role in many industries, from manufacturing to transportation. But what influences the price of oil on world exchanges?
In this matter, three main factors can be distinguished: the political situation in the world, economic indicators and weather conditions.
The political situation has a significant impact on the price of oil. Military conflicts, political instability and sanctions often lead to a decrease in oil production and supplies, which, in turn, stimulates price increases. For example, the oil crises of 1973 and 1979, caused by political events in the Middle East, led to a sharp rise in oil prices.
Economic indicators also play an important role in determining oil prices. In particular, the level of supply and demand on the world market, inflation, exchange rates and the state of the world economy as a whole can significantly affect the price of oil. For example, during the economic crisis of 2008, the demand for oil decreased, and as a result the price went down.
Finally, weather conditions can affect oil production and transportation, which also affects prices.
For example, hurricanes and storms lead to the temporary closure of oil platforms, which causes a reduction in supplies and an increase in prices. In addition, harsh winter conditions could make it difficult to extract and transport oil, which could also increase prices.
The role of OPEC in determining oil prices
The Organization of Petroleum Exporting Countries (OPEC) plays a significant role in determining world oil prices. OPEC is an international organization consisting of 13 countries with the largest oil reserves.
Together, these countries control about 44% of the world's total oil production and about 81.5% of the world's oil reserves. Thus, any decisions made by OPEC directly affect world oil prices.
OPEC decisions that affect the price of oil are mainly related to production levels. OPEC can increase or decrease oil production in order to stabilize oil prices on the world market.
When oil prices fall sharply, OPEC decides to cut production to reduce supply and thereby raise prices. Conversely, if oil prices rise sharply, OPEC increases production to increase supply and lower prices.
The influence of OPEC on oil prices is clearly illustrated by the following events:
- In 1973, OPEC decided to reduce oil production, which led to the “oil crisis” and a sharp increase in oil prices.
- In 2014, OPEC decided not to cut oil production, despite falling prices. This caused a further drop in oil prices.
- In 2020, in response to the COVID-19 pandemic, OPEC and its partners agreed to historic oil production cuts to support prices.
Thus, OPEC plays a key role in determining prices on world exchanges. However, it is worth noting that OPEC is not always the only factor influencing oil prices.
Technical factors affecting the price of oil
One of the modern factors influencing the price of energy resources is technological progress. Modern technologies significantly simplify the process of oil production and refining, which, in turn, affects its cost.
The development and application of new drilling methods, increasing the efficiency of equipment and the introduction of automated control systems for production processes make it possible to reduce costs and increase production volumes. This leads to an increase in the supply of oil on the market and, as a consequence, to a decrease in its price.
Despite all the benefits of technological progress, it often causes rising energy prices. As is the case with the introduction of new, more environmentally friendly technologies, the costs of their development and implementation are very significant and will lead to an increase in the cost of oil in the long term.
Another point that affects the price of oil is speculation on the stock exchange. Speculators actively use various tools and strategies to make money on price fluctuations. They artificially create a shortage or excess of oil on the market, and lead to a change in its value.
Oil Price Forecasting
Experts' forecasts regarding oil prices are very diverse and depend on many factors.
The main ones are the political situation in the world, economic growth or decline in the largest oil-consuming countries, as well as the situation on the foreign exchange market. For example, a stronger dollar usually leads to lower oil prices as it is traded in that currency.
Possible scenarios for the development of the situation on the global oil market are also very diverse. Among the most likely:
- Rising oil prices in the event of increased political instability in oil-producing countries.
- Declining oil prices with increased production in OPEC countries and beyond.
- Changes in prices up or down depending on global economic growth or contraction.
However, it is worth remembering that all of these scenarios can be realized to varying degrees and at different times, since oil prices are influenced by a huge number of factors, many of which are unpredictable.
In conclusion, I would like to note that despite all the difficulties of forecasting, an analysis of the current situation on the global oil market allows us to make fairly informed assumptions about future prices for this most important resource.
However, it will be possible to confidently talk about any specific figures only taking into account all the above-mentioned factors and possible scenarios for their development.