Oil is a very precious resource. Considering how much the global economy relies on oil, it is one of the most important and valuable commodities. Due to its high sensitivity to geopolitical circumstances, it is also one of the most excellent unpredictable resources.
It appears clear why the price of oil is constantly fluctuating when these two factors are combined with the truth that most of the largest global deposits are located in volatile areas of the globe, primarily the Middle East, Africa, and portions of South America.
The link between demand and supply is essential to controlling oil prices. If supply stays constant, costs will increase with demand and decline as supply increases (Supposing constant demand). In light of this, let’s examine the major forces influencing supply and demand. In the recent article, we take a closer peek at the significant variables impacting these factors and controlling oil prices.
Three Factors That Traders Use to Control Oil Prices
When creating offers that affect oil prices, oil dealers primarily consider three things. The present supply, projected supply, and anticipated demand are these.
1. Present Supply
The entire global oil production is the supply at this time. Approximately 40% of the world’s most significant crude oil is produced by OPEC, which significantly controls oil prices globally.
In the United States, shale oil production increased from one million to over 4.8 million barrels per day (b/d) between January 2011 and December 2014. An excess of oil was produced compared to what was needed due to the rise in supply. In February 2016, the price of oil imports fell to about $27 per barrel due to the surge in U.S. oil output.
By the end of 2019, shale oil supply had surpassed 12 million barrels per day, while oil prices per barrel averaged around $57. In 2020, production decreased to 11.28 million b/d. Supply dropped to 11.16 million b/d by the year ending in 2021. Output is expected to rise in 2022, reaching 12.01 million barrels daily.
The U.S. Department of Energy’s Short-Term Energy Outlook estimates that West Texas Intermediate (WTI) oil prices will reach around $68.21/b in 2021. In 2022, rates are predicted to be, on average, approximately $97.96/b.
2. Projected Supply
Oil resources determine how future supplies can be accessed. It covers the supplies found in American refineries and the Strategic Petroleum Reserves. Based on the requirements in the Energy Policy and Conservation Act of 1975, these resources can be easily accessible to augment the oil supply if costs grow too high, if natural catastrophes impede the oil flow into the U.S., or if there is another need for oil.
3. Oil’s Grade
Oil quality is one of the significant factors that control oil prices. It is simpler to process and more environmentally friendly to use crude oil of better quality. You may have encountered the term “sweet crude” used to describe this superior quality oil.
4. Demand for Oil
Crude oil demand controls overall oil prices, just like in other sectors. Oil is still in high demand worldwide, especially for transit reasons. Due to a growing middle class, more cars are on the road in China, India, and other nations. Because more automobiles are on the road, those nations will use more gasoline, raising the demand for crude oil.
Most users do not alter their consumption patterns despite growing expenses brought on by the increased demand for oil and gas. While the market may marginally decline when gas costs rise, most people prefer to use petroleum-based items, maintaining a relatively high level of demand overall.
Renewable energies, fuel-efficient automobiles, and other fuel-consumption reduction strategies often take time and have little effect on the global oil demand. Even when people use these techniques to reduce fuel usage, the rise in the percentage of people using gasoline precludes a fall in order.
The sector may experience a brief rise in demand at specific times throughout the year, which raises the cost of oil per barrel. For instance, the greater use of fuel oil for households and workplaces during the chilly winter months may increase gas and oil costs. People commute more frequently in the summer, which raises the demand for diesel fuel.
5. Worldwide Financial Expansion and a Rebound in Chinese GDP
This is among the most significant elements from the demand perspective that affects the demand for oil products and consequently controls oil prices—the world’s leading oil user in China. China still primarily purchases oil to fulfill its requirements while producing only approximately 5 million daily barrels. Another nation with one of the highest increases in oil use is India. Other countries, like those in the E.U. and Japan, are also net oil consumers. Billions of dollars have been shifted in revenue from oil-producing nations to oil users since November 2014. The oil demand mostly depends on socio-economic expansion. Higher salaries result from economic development, which increases the need for automobiles. One of the main factors influencing oil demand and controlling oil prices is this. In actuality, one of the leading causes of the low oil prices in recent years has been the oversupply of oil on the world market and the inability of demand to catch pace with supply because of the slow socio-economic expansion.
Conflict with one of the major oil-producing countries can result in severe issues because they control the supply. Consequently, if there is a crisis or other turmoil in an area that produces oil, crude stockpiles may appear to be in danger, which could change the price of oil. Geopolitics has, therefore, historically controlled oil prices.
You would typically notice a slight increase in oil prices if issues in the Middle East or other oil-rich places flared up and led to a conflict. Due to the likelihood of a strike by canals or pipeline operators, the disagreement threat would only impact supplies.
In addition, when the United States illegally Invaded, oil prices shot up. Since the Middle East is unstable, it was unclear what would occur to the country’s oil supplies at first. That clarifies how geopolitical considerations have a significant impact on controlling oil prices.
7. Market Speculation
financial markets control Oil prices, suggesting that market volatility about upcoming events may influence controlling oil prices. For instance, if China constructs additional nuclear power plants, oil demand may decline significantly.
Additionally, a rise in international hydraulic fracturing may lead to an even higher increase in oil prices and market speculation. However, the extension and growth of the hydraulic fracturing business as a new source of oil are dubious because several governments worldwide, including France, Germany, and Ireland, have banned hydraulic fracturing.
8. The Inflation Threat
The influence of inflation on the oil market, particularly on controlling oil prices, has emerged as one of the big worries for 2021, and traders are closely monitoring this problem.
According to the consumer price index (CPI), inflation in the United States has speeded up to stages not viewed in nearly 40 years, achieving 6.8%, the quickest rise since June 1982. In contrast, according to the producer price index, wholesale costs have increased by 9.6%. Worries over rising prices eventually hit the Federal Reserve, which revealed plans for three interest rate increases in 2022 during its last gathering of 2021 in December.
OPEC has the power to control oil prices and supply globally.
By establishing production goals for its members, the Organization of the Petroleum Exporting Countries (OPEC) can significantly control oil prices. Some of the most considerable oil resources in the world are represented by OPEC members. From 2020, OPEC countries held around 71% of the world’s proven million barrels of crude oil (including leasehold fractionation), producing 36% of the worldwide proven oil resources.
By establishing objectives or quotas for its members’ crude oil output, OPEC strives to control its members’ crude oil production. Because each member is responsible for their own production choices, OPEC members’ adherence to their quotas varies.
In general, the following criteria determine how well OPEC can control oil prices:
- The level of output quota compliance among OPEC members
- The capacity or interest of customers to cut back on their use of oil
- The ability of non-OPEC suppliers to compete globally as oil prices shift
- OPEC suppliers’ ability to deliver oil more effectively than non-OPEC production companies
The world’s whole excess capacity for producing crude oil is maintained by OPEC members, which is why the discrepancy between non-OPEC supply and demand in the oil sector is frequently alluded to as the “call on OPEC.” The majority of the surplus oil production capacity has always been held by OPEC leader Saudi Arabia, one of the world’s leading oil exporters. As long as the cost of marketing the oil exceeds the cost of supplying additional barrels of oil, international oil companies (IOCs) do not find building and maintaining inactive extra production capacity cost-effective. Thus, the IOC marketing strategy significantly increases revenues by increasing production. An indication of the ability of the global oil market to react to actual and projected interruptions in supply can be found in OPEC’s excess capacity.
Non-OPEC Nations that Produce Oil
The USA, Canada, and China are the three largest oil-producing nations outside of OPEC. With 13 million barrels per day produced in 2017, the United States is the world’s top oil-producing nation.
A second option is the Organization for Economic Cooperation and Development (OECD), whose members generate over 24 million barrels daily, is another option. Non-OPEC countries develop roughly 53 million barrels of crude oil per day.
The Bottom Line
Although the quest for alternative energy sources is gaining momentum, oil has long been the driving force behind the global economy and is a crucial resource. Fuels with a carbon composition are frequently utilized in industrial, heating, and transportation.
While global economic expansion has a significant impact on controlling oil prices, other essential market drivers include:
- Political changes drive supply dynamics.
- Technological advancements in crude extraction.
- The advent of renewable sources of energy.