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| Oil Prices |
Despite ongoing efforts to limit its use and discover other green energy sources, oil continues to play a significant role in the global economy. Finding oil during a drill was once thought to be a bit of a hassle because the intended rewards were usually water or salt. In the Peninsula, Azerbaijan, the first industrial oil well wasn't created until 1847.
The main reason why oil is still in such great demand around the world is that it is used to make gasoline, but how are prices set?
The Factors Affecting Oil Prices
Due to oil's status as a highly sought-after global commodity, there is a chance that considerable price changes might have a big influence on the economy. The following are the two main factors that affect the price of oil:
demand and Supply
Market mindset
Product Price
Geopolitical factors
Demand and Supply
The idea of supply and demand is rather simple. Price should rise as demand (or supply) rises or falls. Price should decrease when supply grows or as demand declines. Sounds basic?
Not exactly. Actually, the oil futures market is where the price of oil as we know it is set.
A legally binding agreement known as an oil futures contract offers one the right to buy oil by the barrel at a specified price on a specified date in the future. In a futures contract, each party is responsible for carrying out their portion of the deal before the deadline.
Market players for oil
There are two categories of futures traders:
Hedgers
Speculators
A Ship purchasing oil futures to hedge against prospective price increases is an example of a hedger. A speculator is someone who simply predicts the price direction without actually planning to purchase the thing.
Market mindset
Sentiment is the other important factor that impacts oil prices. The simple expectation that oil demand would rise sharply at some point in the future can cause speculators and hedgers to buy up oil futures contracts, driving up oil prices now.
Naturally, the inverse is also accurate. Oil futures contracts may be sold as a result of the simple idea that oil demand would decline at some point in the future, which means that prices may depend largely on market psychology.
Oil Prices Are Affected by the Commodity Price Cycle?
Before the turn of the millennium, oil price hikes brought on by disruptions in the oil supply had no impact on the pricing of commodities, but they impacted in more recent times, particularly in the years preceding the Great Recession. In contrast to the earlier period, shortages in the supply of commodities on a worldwide scale brought on by poor harvests have had a beneficial impact on crude oil prices since the early 2000s. The econometric evidence implies that these developments are more likely the outcome of informational frictions about the global business cycle and information discovery in financialized commodity markets rather than the popular biofuels narrative.
Oil Prices Are Affected by Geopolitical Factors?
The issue of producer cartels is another. OPEC, a group of 13 nations (Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela) that collectively control 40% of the world's oil supply, is likely the single biggest factor influencing oil prices.
But in 2022, Russia invaded Ukraine, upsetting the oil and gas industries. Since the United States and most of the West imposed economic sanctions against Russia, the price of oil has surged above $100 per barrel. A barrel costs about $120 as of June 2022.
Conclusion
Contrary to most items, oil prices are not totally influenced by supply, demand, and consumer perception of the actual product. Price determination is mostly influenced by supply, demand, and sentiment toward oil futures contracts, which are extensively traded by speculators. Market cyclical tendencies for commodities could also be important. Regardless of how the price is ultimately set, it seems that oil will remain in high demand for the foreseeable future due to its use in numerous consumer goods and fuels.
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