The Crude Oil Price Story

Prices for Oil are very volatile and change each and every second. What causes the crude prices to change so frequently? We will try and find answer to this question in this discussion.

To begin with let us understand why crude oil is so expensive or what all factors determine or derive the prices of crude oil.

What factors lead to determining crude prices?

Demand for Oil
1. Fuel Needs - More demand for a commodity deader it is likely to get. The summer season driving generally leads to a incremental demand for fuel which pushes the crude price upwards. An opposite trend is prevalent in winters as far driving demand is concerned.

2. Heating Needs - Crude is also basic source to meet the heating requirements during winter season. Therefore its demand to meet the heating needs is increased in winter season pushing the prices upwards.

3. World Economy - As lot of crude oil goes into fuelling requirements of many industries (both for running the industries and transportation of raw materials and finished goods) around the world, as robust world economy would mean greater demand for crude and vice versa.

4. Commodity Exchanges - As crude is traded as a commodity on futures exchange the speculative trends are responsible for increase and decrease of crude oil pricing.

Supply for Oil
1. Supplier Groups - Organization of the Petroleum Exporting Countries (OPEC) is a supplier group that controls 46% of the world's supply of the crude. These groups based out of various different factors can decide to increase or decrease supply application of crude oil directly affecting the prices in the international markets. OPEC member countries were quick to realise that they controlled major chunk of world's oil economy and if they compete against each other their net realizations will be very low. So they decided to form a cartel which takes joint decisions with regarding to controlling of oil supply and prices.

2. War Situation - As production of crude oil is limited to a geographical region, any unrest in these areas can limit the crude supply in the world market leading to instant rise in oil prices. World witnessed this phenomena at the time of Gulf war when the oil prices went shy high. Now international community as a whole takes care that peace prevails in this region and local legitimate interests could be protected.

3. Bilateral Treaties - Bilateral treaties between two countries concerning supply of oil can also control oil prices and its supply.

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