The question here is how are Crude oil prices determined? What drives the crude oil prices, how do traders and investors arrive at Crude Oil prices. In this article, let's look at the answers to some of these questions.
Everyone agrees that Crude Oil today stands as one of the basic and certain needs for energy and has a prime importance in the commodiites market. Therefore you see a lot of interest in the Oil Futures Trading which slips into heavy discounts or get into high Premiums every now and then. Despite the invention of Alternative Sources of Energy (Read Alternative Energy mutual funds), Crude oil still stands as a primary source of energy needs.
This is the reason that not only traders and marketmakers all across the globe, but even corporations, organizations and even governments keep a close eye on the oil prices. Oil prices are responsible for rise or fall of governments. The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly). Related Article: Crude Oil Price: Can you bet on Crude Oil Futures NOW? News
So what affects the Oil prices?
There are certain features which affect the global crude oil prices. We are listing them below:
Production of Crude Oil
OPEC (Organisation of Petroleum Exporting Countries) is the largest conglomerate for producing oil in the world. Any decisions made by OPEC countries to raise the prices or reduce production, immediately impacts the prices of crude oil in the global commodity markets.
Effect on Oil Prices by Natural events
Say a major oil field area is hit by a natural disaster like a huri-cn or a Tusmaani. What will happen? The production will be affected, which will lead to price rise. Recently we have seen many such things in US which have affected the oil productions and taken the oil prices to very high levels.
Black marketing, creating reserves and Inventory for Crude Oil
This is another reason for crude oil price volatility. Sometimes, Oil producers and consumers build a storage capacity to store crude oil for immediate future needs or simply to try and gain from speculation and create a shortage of oil in the market.Any change in these inventory levels triggers volatility in crude oil's prices which in turn creates ripples in the stock markets.
Demand of Crude Oil
Emerging Countries liek India and China are energy hungry, given their huge industrialization plans and energy requirements for a huge population. On top of it, these countries may not have their own resources for getting the oil. Hence, they import oil from other countries. If the demand for oil from these countries increases, the crude oil prices will shoot up and so will the premium on the crude oil futures trading
Any periodic or seasonal or cyclic pattern observed in oil prices
It is observed that oil inventories increase in the summer months and decrease in the winter months. This is because cold temperatures in the winter increase the use of energy for heating in many cold countries. The demand for fuel goes above supply and results in a need to tap inventories. Similarly, during summers, supply generally exceeds demand and petroleum inventories build up. Hence, the crude oil prices drop.
