Traders in the second category are speculators. Their only motive is to make money from changes in the price of oil. Futures speculators are generally the ones that are interested in oil derivatives, trading on small incremental changes in prices.
There are three main factors that commodities traders look at when developing the bids that influence oil prices. These are the current supply, future supply, and expected demand. The current supply is the total world output of oil. Between January and December , the U. This increase in production created an oil glut—which means there was more oil in production than in demand.
The U. Production fell to From January through October, , production dipped to average of Access to future supply depends on oil reserves. It includes what's available in U. These reserves can be accessed very easily to increase oil supply if prices get too high, if natural disasters reduce the flow of oil into the U.
Traders look at world oil demand, particularly from the United States and China. Demand rises during the summer driving season and falls in the winter. To predict demand, forecasts for travel from AAA are used to determine potential gasoline use in the summer, whereas weather forecasts are used in the winter. Natural and man-made disasters can impact oil prices if they are dramatic enough. Recently, pandemics and natural disasters have wreaked havoc on oil prices.
In January , many governments began restricting travel and closing businesses to stem the coronavirus pandemic. As a result, demand for oil began falling. In the first quarter of , oil consumption averaged A drop in demand was worsened by the supply glut. On March 6, , Russia announced it would increase production in April To maintain its market share, OPEC announced it would also increase production. As storage facilities filled, prices plummeted into negative territory.
This action still wasn't enough to convince traders that supply wouldn't outpace demand, and the price of oil continued downhill. Hurricane Katrina was a Category 5 hurricane that hit Louisiana on Aug. Between August 29 and September 5, the U. It was the largest weekly hike in prices on record. One month later, Hurricane Rita impacted the Gulf states. Combined, the effects of the two storms reduced crude oil refinery inputs This was the lowest average output since March Surprisingly, oil spills don't cause higher prices.
For example, the Exxon-Valdez oil spill spewed 11 million gallons , barrels of oil. Although this had a devastating impact on the Alaskan coastline, it didn't threaten the world's oil supply or prices. The BP oil spill spewed 12 times the oil than the Exxon Valdez did, per barrel. Table of Contents Expand. Supply and Demand Impact. Natural Disasters, Politics Weigh. Political Instability.
Production Costs, Storage Impact. Interest Rate Impact. Key Takeaways Oil prices are influenced by a variety of factors, particularly the decisions about output made by producers like the Organization of Petroleum Exporting Countries OPEC , independent petro-states like Russia, and private oil-producing firms like ExxonMobil. Like any product, the laws of supply and demand influence prices.
Natural disasters that could potentially disrupt production, and political unrest in oil-producing countries all impact pricing. Production costs influence prices, along with storage capacity.
Although less impactful, the direction of interest rates can also influence the price of commodities. Article Sources.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Oil How Petrodollars Affect the U. Oil What Determines Oil Prices?
Oil OPEC vs. Partner Links. Shale oil is a type of oil found in shale rock formations that must be hydraulically fractured to extract. Read about the pros and cons of shale oil. What Is Peak Oil? Peak oil refers to a hypothetical point at which global crude oil production will hit its maximum rate, after which production will start to decline.
Crude Oil Definition Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. What Is a Derivative? A derivative is a securitized contract whose value is dependent upon one or more underlying assets.
Its price is determined by fluctuations in that asset. Oil is traded globally and can move from one market to another easily by ship, pipeline, or barge. Prices vary globally to reflect the cost of transporting crude oil to that market and the quality differences between the various types of oil. In addition to all of the actual barrels of oil that are traded, there is a second market — the futures market — that trades in "paper" barrels.
This simply indicates that oil is traded on "paper" based on a perceived monetary value of oil and there is not usually a physical exchange of the product.
Paper contracts for oil are bought and sold based on the expected market conditions in the coming months, or even years. Media most often quotes the futures market price in the nearest month as representative of the current price of oil. The current spot price for oil is influenced by the futures market price because the futures price represents the market's collective view, at a given point in time, of where prices may be headed.
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