Most of us are familiar with the constant price change in oil, but while filling your car up on gas, have you ever wondered what it is that decides the price of oil? Well, there are numerous factors that can affect the cost of oil. The decision of the Organization of Petroleum Exporting Countries (OPEC) holds the most power over the price of oil as it has control over 40 per cent of the world’s oil supply and therefore have capability to determine oil prices based on supply and demand.
OPEC
OPEC is an international organization that was formed by five countries in the ‘60s, but is now comprised of 15 countries. In 2016, these 15 countries held roughly 81.5 per cent of the entire world’s crude oil reserves, with Saudi Arabia being the organization’s largest producer of oil. OPEC’s core purpose is to instill stability within the oil industry through its implementation of policies that protect both the supplier and the consumer and its regulator-type power. Although it has a significant impact in the decision surrounding the cost of oil, OPEC does no hold the ability to make these decisions alone. As crude oil is a commodity that is shared worldwide, both events and supplies have a significant influence on its price.
Factors in pricing
OPEC is the most significant governing body of oil on the international scale; however, it is only one of many factors that determine oil prices. Factors that drive the price of oil on the global market include the following:
In summary, the state of the oil market depends heavily on supply and demand and market sentiment; however, it is primarily the oil futures market within supply and demand that sets the price of the commodity. A futures contract is an agreement that allows the purchaser to buy oil at a set price and the seller to sell it at that same stated price. These contracts protect both the buyer and the seller as it promises both parties a price for the oil products – limiting the effect of harmful price fluctuations. Market sentiment, however, plays its own role in the psychological aspect of oil pricing. Anticipation for increased demand can spark a growth in price, just as the anticipation for decreased demand can causes prices to drop immensely.
Commonly there are cycles in the cost and pricing of oil. This simply means that the pricing often his highs and lows in similar patterns over time. However, supply, demand and sentiment are always the most significant factors to the cost of oil as cycles are usually just a product of the three core factors. Conversely, the price of oil does not depend solely on these factors, but on a combination of them in consideration of futures contracts within the oil industry.
Resources
Information on the above topic was pulled and summarized from the following articles:
https://www.smarttouchenergy.com/resources/why-do-oil-prices-rise-and-fall
https://www.investopedia.com/articles/economics/08/determining-oil-prices.asp
