Of all industries in the world, oil industry is indeed an international business which affects most countries in the world. As the oil is the most consumed energy, it plays a vital role in daily lives as well as economy and social development. Also, the oil industry leads to new technology development both directly and indirectly. It has been deployed as a means for economy and political negotiation. Nevertheless, “crude oil” when refined into various petroleum products having different attributes i.e. gasoline, diesel, aviation fuel, kerosene, and fuel oil, and others, its value will be maximized. The price of crude oil is thus determined by the type and quality of the crude oil itself. Once distilled, heavy and light crude oil yield several refined products e.g. gasoline and diesel to serve demands at different quantities. In addition, sour and sweet crude are also priced differently.
Forecasting or estimating oil price in the future is sophisticated because oil is the commodity product which is available globally. Unlike other products, the quality of oil product can be made different to serve different needs of consumers. As the oil market is mainly regional activities which are born of cooperation from various countries and parties having different needs and environments, several factors then involve both directly and indirectly. Nevertheless, the price can be analyzed at both regional and global levels.
Here are the main factors that affect the oil prices across the globe:
1. Fundamental factor
The fundamental factor of oil price determination, is demand and supply like other type of products. Demand and supply of oil products change according to situation and circumstances. In any market situation, imbalance between demand and supply can affect prices. For instance, in the case of more demand than supply (undersupply), the price is likely to rise.
2. Sentimental factors
The oil market is naturally more sensitive to news than other market. The sentiment of oil traders is the key factor to drive oil price to quickly respond to the news. The political and economy movement in any region can impact the world oil price. Particularly, in unordinary situation e.g. major war, the price is quite volatile. The news about the major oil producers 2 and users in the world especially in the Middle East, North Sea and the USA, etc predominantly impacts oil market more than the news about other regions. Therefore, monitoring unrest political situation, strike, coup d’etat, assassination of political leaders of OPEC countries or the decision of international organization which influences international politics, is thus critical. These news all affect the price adjustment due to the concern and worry despite the fact the production and export volume still remain unchanged.
3. Technical factor
To trade oil product in the market, apart from monitoring news and movement according to fundamental factors of oil market, the traders require information, statistic as well as average price record or history of the oil products to determine the price of today. This information also affects the decision of oil sale and purchase as well as poses an indirect impact of price level. Especially, the impact is greater in the future market which has a larger trading volume larger than the real existing volume in the market. The trading is mostly speculated for profit making. At present, there are five major future markets: New York Mercantile Exchange (NYMEX), New York, USA; International Petroleum Exchange (IPE), London, UK; Singapore Monetary Exchange (SGX), Singapore; Tokyo Commodity Exchange (TOCOM), Japan; and Shanghai Futures Exchange, China.
4. Miscellaneous factor: Foreign exchange
The oil is traded internationally and sold in US dollar. Therefore, the value change of foreign currency when compared with US dollar, affect the price of oil. When US dollar devalues, the price of imported crude and finished products will be cheaper when calculated in local currency. Conversely, the price when calculated in US dollar, will be higher. The stronger US dollar will also result in lower oil price. Furthermore, the fluctuation of foreign exchange will make it more difficult for traders to compare the price of oil in each market.
It can be concluded that no one can predict the price of oil in the future with certainty. But we may estimate the price and direction of oil price by taking into account various aforementioned factors. The oil price depends on a number of variables or situations occurring during a particular period. The understanding of price mechanism deems vital and most important for planning and managing energy utilization effectively and promptly.
Barell, R., P. Isard, and D. Laxton (2002) The Macroeconomic Effects of Higher Oil Prices, Review 179, January.