Things That Significantly Affect Oil Prices
Although oil as a commodity has been in demand and in use for almost a century, its impact and role in the global economy has never been this huge. Today, the value of this precious resource is so high that it can sometimes be the cause for conflict and war. It’s kind of interesting how oil transformed itself, especially if you consider the earliest days of drilling it wherein people looked at it as nothing but nuisance since everyone was more concerned about other resources such as salt.
Oil today is used and transformed in many different products, and thanks to the abundance of it in many parts of the world, we now enjoy cheap oil prices, at least from time to time. For instance, crude oil is processed to produce stuff like diesel oil, ethane, heating oil, gasoline, benzene, jet fuel, and others.
What Determines Oil Prices Today
Being one of the most in-demand global commodities, it’s no longer a secret that even if oil is abundant, the prices can easily fluctuate. Generally speaking, the two main factors that affect the price of oil are: market sentiment and supply and demand. Let’s talk about supply and demand first…
Everyone, even grade school students have an understand of how the concept of supply and demand works. When demand of a product increases or if the supply decreases, the price of that product normally goes up. But when demand decreases or supply increases, the price is expected to go down. But with regards to oil, the same concept isn’t just as simple as that. First of all, the price of oil is actually set in the oil futures market. For starters, an oil futures contract is a type of agreement giving an entity or individual the right to purchase oil by the barrel at a predetermined price on a predetermined date. In this type of contract, the buyer and seller have the obligation and responsibility to fulfill their part of the transaction.
Aside from supply and demand, market sentiment is also another determining factor for the price of oil. What this means is that the simple yet dumbfounded belief that oil demand will increase will eventually result to a dramatic increase in oil prices in the present, merely because speculators as well as hedgers will snap up oil futures contracts. On the other hand, the belief that oil demand will decrease in the near future will likewise lead to a dramatic increase in prices of oil in the present because oil futures contracts are sold.
Oil today is used and transformed in many different products, and thanks to the abundance of it in many parts of the world, we now enjoy cheap oil prices, at least from time to time. For instance, crude oil is processed to produce stuff like diesel oil, ethane, heating oil, gasoline, benzene, jet fuel, and others.
What Determines Oil Prices Today
Being one of the most in-demand global commodities, it’s no longer a secret that even if oil is abundant, the prices can easily fluctuate. Generally speaking, the two main factors that affect the price of oil are: market sentiment and supply and demand. Let’s talk about supply and demand first…
Everyone, even grade school students have an understand of how the concept of supply and demand works. When demand of a product increases or if the supply decreases, the price of that product normally goes up. But when demand decreases or supply increases, the price is expected to go down. But with regards to oil, the same concept isn’t just as simple as that. First of all, the price of oil is actually set in the oil futures market. For starters, an oil futures contract is a type of agreement giving an entity or individual the right to purchase oil by the barrel at a predetermined price on a predetermined date. In this type of contract, the buyer and seller have the obligation and responsibility to fulfill their part of the transaction.
Aside from supply and demand, market sentiment is also another determining factor for the price of oil. What this means is that the simple yet dumbfounded belief that oil demand will increase will eventually result to a dramatic increase in oil prices in the present, merely because speculators as well as hedgers will snap up oil futures contracts. On the other hand, the belief that oil demand will decrease in the near future will likewise lead to a dramatic increase in prices of oil in the present because oil futures contracts are sold.
Ever since the rise of oil as a commodity in the early part of the 1900s, major peaks in the commodities index happened in several occasions, including in 1920, 1951, and 1980. It is however crucial to acknowledge that supply, demand, as well as sentiment always take precedence over cycles since the latter are mere guidelines and not really rules.
But in the end, it must be realized as well that unlike other similar commodities, oil prices aren’t really determined exclusively by demand, supply, and market sentiment, at least towards the physical product. Instead, demand, supply, and market sentiment toward oil futures contracts, which in turn are heavily traded by speculators, play the most critical role. Furthermore, cyclical trends in the commodities market could also play a significant role. But whatever the factors are, the fact remains that oil will remain to be constant demand today and in the future.
But in the end, it must be realized as well that unlike other similar commodities, oil prices aren’t really determined exclusively by demand, supply, and market sentiment, at least towards the physical product. Instead, demand, supply, and market sentiment toward oil futures contracts, which in turn are heavily traded by speculators, play the most critical role. Furthermore, cyclical trends in the commodities market could also play a significant role. But whatever the factors are, the fact remains that oil will remain to be constant demand today and in the future.