Important Factors that Influence Oil Prices

Oil stocks can be volatile in periods of economic uncertainty. They play a huge role in the overall economy since fossil fuels are what power most of America and the world. Additionally, many materials such as plastic are made from oil, so it’s a core industry that impacts the entire economy.

Supply and Demand

The biggest indicators of where oil stocks are headed are supply and demand. The supply side is heavily controlled by crude oil giants such as the Organization of Petroleum Exporting Countries (OPEC), which supplies nearly a third of America’s oil. At one time OPEC based supply on a quota system but has shifted to a different strategy following the United States doubling its domestic shale oil production between 2011 and 2014, which drove prices down. OPEC then began increasing supply to lower its cost per barrel to be competitive. ExxonMobil and other standalone oil giants also set production schedules that affect oil pricing.

Consumer demand is another big factor affecting oil pricing. Sometimes when oil costs get too high, demand drops due to people conserving energy, carpooling or taking public transportation to cut bills. Demand tends to pick up in the summer when people travel more as well as in the winter when homeowners use more heat.

News and Political Events

Many times crude prices move according to political disagreements between two countries, such as the United States and Iran. Tension has been felt between the two nations over the United States pulling out of a nuclear agreement with Iran. This friction has contributed to oil having a volatile year in 2019, along with President Trump’s trade war with China. These factors, along with inconsistent demand, have caused major oil organizations to slow down global production. The surplus in oil inventories has kept prices from escalating.

It’s best to stay informed of political events that affect oil prices by subscribing to publications that specialize in the oil and gas industry. Political issues between countries have a dramatic effect on supply, which Americans learned about with the 1973 Arab Oil Embargo. Wars in the Middle East have also traditionally driven up crude prices.

Another type of news story that can affect oil pricing is a natural disaster. When a place like Houston, which is home to major oil refineries, gets hit with a hurricane that causes major flooding and power outages, it can create supply shortages. A fire at a refinery can also lead to shortages. The fact that the United States has emerged as a big producer of shale oil has altered history in the sense it is less dependent on foreign oil. North America has plenty of reserves to offset global crises.

Challenges from Renewable Energy

In August 2019 the world’s 8th largest band, BNP Paribas, warned that oil will not be able to compete with renewable energy in the future due to falling battery prices. The bank’s report called “Wells, Wires and Wheels” explains how solar and wind have reshaped the European utility industry over the past decade to the point it should be a wake up call for the oil industry.

So far renewable energy companies have yet to strip large oil companies like ExxonMobil and Chevron of their billions in quarterly revenue. But solar and wind technology are rapidly improving to be more cost-effective than oil. The more investment pours into renewable energy, the more pressure it will put on oil companies to also invest in more sustainable energy sources. In other words, green energy companies won’t likely run oil giants out of business anytime soon. It’s more likely they will transform oil companies into broader energy companies.

How to Play the Oil Market

In the summer of 2019 the price of crude oil is about $55 per barrel, about $10 lower than the previous summer. Oil hit an all-time high near $73 in October 2018. The price then plunged a month later and has since stayed locked in a tight range between $55 and $65. It’s advantageous to focus on this price range during the current era. If the price gets back up above $73 then it should be viewed more for long-term investment rather than short-term trading.

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About the Author: Francis E. Hagopian

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