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4 essential things to know about crude oil pricing

Crude oil prices are influenced by its supply and demand globally. Economic growth has the biggest impact on the demand for certain things, and growing demands require energy. Petroleum products comprise a third of the total energy consumption in the world; these products are made from crude oil and other hydrocarbon liquids. The supply, demand, and the market price of crude oil are affected by the seasonal changes in demand for petroleum products.

Influence of the OPEC in oil supplies and pricing
By setting certain targets of production for its members, the Organization of the Petroleum Exporting Countries (OPEC) have a major influence on the present prices as well as the futures forecast of crude oil. Some of the countries in the world that have the most oil are members of this organization. The largest producer of crude oil within the OPEC is Saudi Arabia; it is also one of the world’s largest oil exporters. All countries in the OPEC combined, control about 73% of the world’s total proved oil reserves. In the year 2016, around 44% of world’s crude oil was produced by these member nations.

Three key factors that help in determining how the OPEC influences oil prices are as follows:

  • The number of consumers who are unwilling or unable to stop using crude oil.
  • The non-OPEC producers’ actions and reactions when oil prices change.
  • The efficiency of crude oil supply by OPEC producers as compared to non-OPEC producers.

Moreover, the entire world’s spare crude oil production capacity is maintained by the OPEC. The world oil market’s ability to react and survive a potential oil crisis that would result in a reduced oil supply is indicated by the spare crude oil production capacity of OPEC.

Disruptions in supply and its influence on oil pricing
Various geopolitical events, as well as weather conditions, tend to disrupt the supply of crude oil and other petroleum products. This, in turn, affects the market price of crude oil and other petroleum products. Moreover, these events create an uncertainty in the futures forecasts of crude oil and other petroleum products. In the short term, the volatility of oil prices is related to the low responsiveness or even inelasticity of the demand and supply of crude oil. In the near terms, it could be difficult for consumers to switch to other fuels options or increase fuel efficiency when the prices rise, as it would take years to develop new supply sources and the switch will not be easy.

Global auction of crude oil and petroleum
Thousands of transactions take place simultaneously around the world at all levels of the supply chain, ranging from a producer of crude oil to the individual consumer who is using it. This results in determining the prices of crude oil and other petroleum products. Oil markets are like a global auction, where the highest bidder wins the supply that is available. When the market condition is such that the demand is high and the supply is low, the bidder will be willing to pay a higher premium. However, when the demand is low and the supply is high, a bidder may not prefer to outbid his competitors as, like any other auction, the bidder would not want to pay a lot.

Crude oil futures forecast
Crude oil is traded in the futures market. To buy and sell a specific commodity of a standardized quality at a certain date in the future, a futures contract acts as a standard one. By selling a futures contract today, oil producers can lock in their desired price if they want to sell oil in the future. Alternatively, by buying a futures contract, consumers can guarantee the price they will pay in the future for crude oil. Moreover, futures contracts are bought and sold by speculators or market participants who neither produce nor consume crude oil. These types of traders buy and sell futures contracts on the basis of crude oil futures forecast to make a profit from the changing prices of crude oil. The changes in the supply and demand of crude oil influence crude oil futures forecast and even current prices. Each futures contract covers around 1,000 barrels, and the dates for delivery are available for up to 9 years into the future. Investors are usually not interested in possessing thousands of barrels of crude oil; they participate in futures market even without dealing with the actual physical delivery. These investors purchase futures contracts by researching about the futures forecast of crude oil and possible fluctuations its prices. The futures forecast of crude oil helps them to determine if it is profitable or not to invest in the futures contracts for crude oil in the present. Moreover, if you invest in energy companies, note that they are likely to use futures for their own accounts and their shares are likely to be affected by crude oil futures forecast and natural gas price forecasts. Hence, if you invest in energy companies, understanding how oil futures work is essential.

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