Top Factors That Affect the Price of Oil

Crude oil, or “black gold,” is one of the world's most precious commodities: Its price affects the economic ecosystem at every level, from family budgets to corporate earnings to the nation's GDP. 

Crude oil prices are also incredibly sensitive, changing quickly in response to news cycles, policy changes and fluctuations in the world's markets, and price drops and spikes can send global exchanges into a tizzy. Oil prices took a downward journey beginning in the middle of 2014 when it was trading around $105 per barrel. Since that peak, prices have dipped under $30 per barrel, but have since traded around the $70 level for much of 2018. 

These overall shifts in pricing depend on many of the factors outlined below:

For several decades, the Organization of Petroleum Exporting Countries (OPEC) has been the elephant on the world's trading floors, with its oil-producing member nations working together to determine prices by boosting or reducing crude oil production. While OPEC's grip on the market has loosened some in past years, its decisions continue to play a dominant role. OPEC's every move is watched closely by governments, oil companies, speculators, hedgers, investors, traders, policymakers and consumers.

OPEC's policies are affected, in turn, by geopolitical developments. Some of the world's top oil producers are politically unstable or at odds with the West (issues pertaining to terrorism or compliance with international laws, in particular, have been problematic). Some have faced sanctions by the US and UN. In the past, supply disruptions triggered by political events have caused oil price to shift drastically; the Iranian revolution, Iran-Iraq war, Arab oil embargo, and Persian Gulf wars have been especially notable. The Asian financial crisis and the global economic crisis of 2008-09 have also caused deep fluctuations. 

The supply crude oil is also determined by external factors, which might include weather patterns, exploration and production (E&P) costs, investments, and innovations.

(Related reading, see: Leading Economic Indicators for Oil Prices)

Strong economic growth and industrial production tend to boost the demand for oil — as reflected in changing demand patterns by non-OECD nations, which have grown rapidly in recent years. According to the U.S. Energy Information Administration, “oil consumption in the Organization for Economic Cooperation and Development (OECD) countries declined between 2000 and 2010, [while] non-OECD oil consumption increased more than 40 percent. China, India and Saudi Arabia had the largest growth in oil consumption among the countries in the non-OECD during this period.” 

Other important factors that affect demand include transportation (both commercial and personal), population growth, and seasonal changes. Oil use increases during travel season and in the winters when more heating fuel is consumed.

(Related reading, see: Oil Price Analysis: The Impact Of Supply & Demand)

More and more market participants are buying and selling crude oil, not in its physical form, but in the form of contracts. Airlines and oil producers use derivatives, like futures and options, to a hedge against swings in the price of oil, while speculators drive those prices upwards or downwards.

Reports on production figures, spare capacity, target pricing, and investments can be a crucial factor in the setting of crude oil prices. Some of the most keenly followed reports are the OPEC Monthly Oil Market Report, International Energy Agency (IEA) Oil Market Report, American Petroleum Institute (API) Inventory Report, US Energy Information Administration’s (EIA) Reports on Crude Oil Stockpile, Short-Term Energy Outlook, Annual Energy Outlook, Monthly Energy Review, and International Energy Outlook.

Reports by the National Bureau of Statistics of China are also monitored closely (as are reports of ongoing events) and the Bureau of Economic Analysis' quarterly U.S. GDP report highlights crucial macroeconomic numbers.

Oil has long been the engine of the world's economy, and even today – as the search for alternative energy sources gains ground – life without crude oil is hard to imagine. Carbon-based fuels are used in heavy and light manufacturing, in the production of chemicals, textiles, detergents, and medicines and in every sector of our transportation industries. For now, at least, oil companies and oil-rich nations will surely weather dips, or deeper plunges, in oil prices.

(Related reading, see: Companies Affected Most by Low Oil Prices)