Crude Oil – Factors that affect its price
Crude Oil Overview
Crude oil can be described as an unrefined petroleum product that occurs naturally mainly consist of hydrocarbon deposits along with other organic materials.
It is a fossil fuel that is refined in order to produce usable petrochemicals such as petroleum, diesel, gasoline, and others. As a fossil fuel, crude oil is one of many non-renewable resources being consumed at a rate much faster than it can naturally form.
Crude oil is a global commodity that is extracted from sources worldwide mainly from Saudi Arabia, the United States, Russia, China, Iran, and several other countries with extractions of up to 11.75 million barrels a day.
As a primary source of energy production, Crude Oil still is one of the most important global commodities which is why it is also known as “Black Gold” despite its viscosity and variety of colors ranging from black to yellow, depending on the composition of hydrocarbon.
The Adverse Effects of Reliance on Oil Resources
One of the main reasons ascribed to global warming is the heavy reliance on fossil fuels which has proven to be detrimental when considering that it is a non-renewable resource and that it is being consumed at a rate that exceeds its ability to reoccur naturally.
With a substantial limit on fossil fuels, a vast amount of manufacturers have gone into the development of alternative energy sources such as cars that run on electricity, solar panels that provide homes with power, along wind turbines as an alternative source of power.
There have been significant moves toward a “Greener” future with principles of sustainable development slowly being enforced to try and conserve non-renewable resources and to try and offset the effects of global warming, although this remains to be a controversial subject.
What Determines the Price of Crude Oil and what affects it
The price of crude oil is determined by commodity futures. Different investors consider the factors that may affect the value of oil and according to these factors, a price is determined according to which crude oil is bought and sold in the future.
The three typical factors that are considered when determining the price includes:
- How much oil there is currently available in storage
- What the current output of oil is, and
- What the speculative and expected demand for both gas and oil will be
Two thirds of the petroleum in the world is controlled by the Organization of Petroleum Exporting Countries, or OPEC.
OPEC is mainly responsible for nearly half of global oil exports and therefore there is a concerted effort to ensure that supply is limited enough to prevent prices from dropping substantially.
Should the supply of oil exceed demands and therefore fall into abundance, prices will decrease as opposed to when there is a limited supply, in which case prices are significantly higher.
Crude oil prices are not merely affected by OPEC, there are various other factors outside of this organization that may tilt prices such as:
- Increased demand of gasoline or petroleum for vehicles along with sudden decreases in demand of such.
- When and where economies become sluggish and inflation is higher than normal, which in general will increase prices on goods such as food.
As with price movements in other financial instruments, price movements that drive commodities in either upwards or downwards direction are also a result of political and economic situations in countries around the world.
By watching current events and identifying possible trends, investors adjust the prices accordingly. Prices on oil are even adjusted between seasons, with heating oil being in higher demand during the winter months.
Another factor that affects the price on oil, is the US Dollar and how it performs against other global currencies, with price movements in either direction occurring drastically and often frequently as the US Dollar strengthens or weakens.
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How is Crude Oil Traded?
As one of the most actively traded commodities in the world, crude oil is mainly traded on futures contracts due to the substantial activity on the market with oil prices that can fluctuate frequently and in a short amount of time, making the market extremely volatile.
The most popular grade of crude oil traded is that of light sweet crude oil, along with Brent Blend Crude Oil, which is the benchmark according to which gasoline prices are determined.
When trading on the futures market, it is imperative that traders know that futures contracts are traded according to an expiration date and at the set price, so the contract has to be bought, sold by this date and according to the price that was set.
There are also specifications pertaining to trading crude oil that traders have to understand, including, but not limited to:
- The exchange on which it is traded is the New York Mercantile Exchange, or NYMEX.
- The contract size is 1,000 U.S. barrels
- It can be traded during the year, there is no set month.
- The price quote per barrel is according to the current price set by investors who buy and sell crude oil.
Traders need to keep in mind that every third business day before the 25th calendar day of the month is the last trading day, preceding the delivery month. To avoid physically taking delivery of 1,000 barrels of crude oil, the trade must be offset before the expiration date.
How Does the Covid-19 Pandemic affect Prices on Crude Oil and Why
The emergence and spread of Covid-19 have brought on global economic distress as countries rose to the challenge through the forced shutdown of several sectors, numerous
companies, and operations in an attempt to curb the spread of the virus.
Demands on crude oil plummeted and with it, the price thereof as prices were at an all-time low since January 2019. Covid-19 significantly slowed the global economy which resulted in this lower demand for crude oil.
Crude oil opened in 2024 with prices at $61.18 a barrel and by April, the price had fallen to around $28 a barrel with US oil prices tumbling to $19.20 a barrel, the lowest that it has ever been in 18-years.
Productions had been halted by OPEC until March with most restrictions on production being lifted at the beginning of April, especially in Russia. This resulted in an abundance of supply which caused prices to drop even further with a lack in demand to offset such.
Prices fell into a substantial negative at -$37.63 per barrel. To offset this, an agreement between Russia and OPEC was reached for lower outputs in support of prices with reductions lasting until April 2024, sending the prices out of a negative range.
Earlier in May, with restrictions being lifted slowly, the price on crude oil increased and forecasts on the price on Brent Crude Oil for year-end 2024 are currently standing at $43 per barrel, with a $55 per barrel price forecasted for mid-2020.
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Final Thoughts
Keeping the different factors in mind that determine the price on Crude Oil, it is apparent that the slightest changes whether politically or economically inclined can shift the balance and sent prices either in an upward or downward trend.
With the current Covid-19 pandemic still continuing on a global scale, the recovery in the oil market is likely to be slow as the aviation sector around the globe remains closed and with travel restrictions on an international front still being firmly in place to curb the virus.
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