A multitude of factors influences the pricing of oil. Let’s list the major ones.
- Supply and demand. Perhaps the most important factor. The ordinary law of supply and demand: when demand for oil outstrips the available supply, prices tend to rise. Conversely, when there is excess supply, prices tend to fall.
- OPEC decisions. The Organization of Petroleum Exporting Countries (OPEC) is a cartel that controls a significant portion of global oil production. Their decisions on production levels can significantly impact oil prices. For example, if oil prices fall quickly, OPEC+ countries may agree to reduce oil production, reducing the supply on the oil market and thus stopping the fall in prices.
- Economic conditions. The state of the global economy can also affect oil prices. When the economy is growing, demand for oil tends to increase, driving up prices. Conversely, when the economy is struggling, demand for oil decreases, causing prices to fall. For example, many analysts now expect China’s demand to increase after Covid restrictions are lifted. There is enough supply in the market, so an increase in demand can lead to an increase in oil prices.
- Geopolitical events. Political instability, wars, and conflicts in major oil-producing regions can disrupt supply and cause prices to rise. After Russia’s invasion of Ukraine, oil prices rose sharply as European countries began to refuse Russian oil, and supplies were disrupted. Another example. During Covid-19, many economies began to close, and people began to travel less. Demand plummeted while supply remained high. This led to a rapid drop in oil prices.
- Natural disasters. Natural disasters such as hurricanes and earthquakes can disrupt oil production and transport, causing prices to rise. For example, pipeline disruptions due to weather conditions can disrupt oil supplies. A disruption in supply is a reduction in supply. When demand is high, it causes the price of oil to rise.
- Currency exchange rates. Oil is typically priced in US dollars, so fluctuations in exchange rates can impact the cost of oil for buyers in other countries.
Let’s summarize: oil prices tend to rise when there is strong demand and limited supply, as well as during periods of geopolitical instability and natural disasters that disrupt production. Conversely, oil prices tend to fall due to weak demand, excess supply, and stable geopolitical conditions.
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