We all know the economic model that indicates when supply is low and demand is high, prices rise (and vice versa). But, supply and demand are just one of the many factors which will have an impact on the price of crude oil. Given the economy, financial markets, and the current state of politics in the US (trade wars, impeachment, etc.), there are several variables that come into play in determining prices of crude oils and other natural resources. So, what are the top factors that affect crude oil prices? At this point in time, these are among the most prominent.
- Supply and Demand
There’s no way around it, this is probably the factor which is going to have the greatest impact in considering the top factors that affect crude oil prices, or pricing for any commodity for that matter. The more crude oil that’s being produced, from different regions in the world, the cheaper it is going to cost per barrel. How do supply and demand impact pricing?
- Supply is low and demand is low, prices won’t fluctuate much
- Supply is low and demand is high, cost per barrel will rise
- Supply is high and demand is high, prices will increase/fluctuate accordingly
- Supply is high and demand is low, prices should drop.
Of course it isn’t a perfect linear pattern that the supply and demand curve will play at all times, but this is how things typically work in the markets. It’s not just with crude oil, it’s virtually anything (food, clothing, tech, etc.). Therefore, understanding what supply and demand cycles look like, will be a great indicator as to when to buy crude oil, to ensure the lowest pricing.
- Trade Wars and Political Wars (Turmoil)
This is more of a recent issue, given President Trump’s ongoing trade wars. China, Mexico, Canada. Then there’s the crisis in the middle East, Iran and Iraq conflict, and other political turmoils. The US always seems to be in the middle of these worldwide events, however, during this President’s tenure, political events and turmoil seem to play a greater role in the pricing of crude oil and goods from around the world in general. Political events, war, peace, and standoffs, are some of the many worldwide events, which will impact the prices of crude oil.
- Commodity Price Cycles
OPEC and CME are great indicators of the commodities price cycles, and how the cost of crude oil is fluctuating, at any given point in time. Just looking through history, you can see the dips and hikes in graphs, which suggest that the rise in prices of commodities or drops, will also impact the price that buyers are willing to pay, and sellers will sell crude oil at. This is something that fluctuates daily, therefore, the price per barrel can dip by $10 dollars one day, and the next rise by $100.
- Hedgers and Speculation
This is another big factor among the top factors that affect crude oil prices. A hedge is an investment which reduces the risk of adverse price movements in an asset. This is oftentimes used in pricing for crude oil, airlines, and other high risk or volatile industries. The process of hedging is like taking out an insurance policy on the price of crude oil. It’s insurance that even in the risky market, prices will remain around a certain figure.
Then there are speculators. Speculators will drive the prices (of hedgers) up or down. They speculate something is going to cause the demand for crude oil to dip, therefore, the market will react accordingly and sellers will reduce prices per barrel. If speculators indicate a war or possible trade conflict, the country which has power in that specific situation, can increase the price per barrel.
It’s a game of chess, and this is one of the biggest trends which will impact the price of crude oil, and how much buyers are willing to pay, and how low sellers are willing to go, given a specific turmoil or world event that’s taking place at any given time.
- Global Recession
Dips in stock markets, Forex trends, reduction in investments, and other global recessional factors, will impact the price of crude oil. In the current economy, we’re in one of the worst bull markets the country’s seen in quite some time. The US impacts other regions of the world, and vice-versa. Major markets, and their financial status, will have an impact on the price of crude oil and other commodities. Depending on how well a particular market is doing, and how well a global currency is doing, prices of commodities will rise and fall accordingly.
- Maritime Law
Crude oil is sold and purchased around the world. IMO rules, legislation in production of crude oil, shipping laws, trade wars, and other maritime legislation, can greatly impact the price of crude oil. New regulations go into effect regularly, and there are different regulations that are put in place to ensure the safety of transport, as well as the safety in production of crude oil. Maritime laws at any given point, and international norms (and governing bodies that regulate international sales and trade) have an impact on how prices of crude oil dip and fall at different points in time.
- Worldwide Events
Bringing all of these points together, worldwide events, politics, political leaders, and other news cycles, are some of the top factors that affect crude oil prices. Each country wants to maintain the upper hand (both those that produce crude oil and those that purchase in high volumes). Therefore, to some extent, egos come into play as well.
It’s important to understand current events, trends, and the cost of natural resources in general, to understand how prices fluctuate as it relates to the purchase/sale of crude oil, and other natural resources. These are among the top factors that affect crude oil prices, however, depending on a specific event, or recent development in government relations between certain countries, the prices can fluctuate greatly at any point in time as well. Therefore, it’s important to remain abreast on politics, news cycles, and trends (around a particular time of year), to understand how prices of crude oil will fluctuate.