As each day go, oil begins to play a huge role in the global economy. During the early days of exploration, people didn’t immediately begin to find oil as then the common mineral resources were salt and water. Around 1847 that was when the first oil well was drilled in Absheron Peninsula, Azerbaijan.
The US petroleum industry got started 12 years after the first oil well was drilled and it has survived over the years producing millions of barrels of oil. Many people can argue that the modern oil era started as soon as oil began to replace coal as the world’s primary fuel source.
Since the shift in the source of fuel, the use of oil has become a primary factor in increasing the high demand for these resources worldwide but what determines the prices?
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Oil prices determinants
With the demand for oil being global, the swing in oil prices may have a major economic impact on the sale of oil. The major factors that determine the price of oil are demand and supply and market sentiment.
The concept of demand and supply as we all know it works perfectly for the oil market but is it that simple? The price of oil is set in the oil futures market and an oil futures contract is used to give one the right to buy oil by the barrel at a pre-agreed price on a predefined date in the future. With this futures contract, both players in the trade are obliged to fulfil their side of the deal on the agreed date.
The sentiment is the other factor that determines oil prices. Having a mere belief that oil prices can increase and decrease sometime in the future can lead to a future increase or decrease in oil prices in the present because like buyers, hedgers and speculators do also acquire oil futures contracts.
So, if you have any thought regarding the cost of oil in the future, due to the sale of oil futures contracts, those thoughts can become reality. Find out more at Oil Profit.
Commodity Price Cycle Affecting Oil Prices
The prices of commodities, in general, are guided by a 29-year cycle. Since oil began to rise as a high demand commodity, there have been several peaks in the commodity index in 1920, 1958, and 1980. Note that oil peaked within the commodities index in 1920 and 1980 but no peak within 1948 to 1968. In the field of oil trading supply, demand and sentiment come first over cycles because cycles are rules and not guidelines.
Forces impacting oil prices
Different forces are impacting the cost of oil from within. One of those forces is cartels but the biggest factors of them all are OPEC. They are a member organization for oil and gas producing countries all over the world. They control about 40% of the world’s oil.
OPEC was put together to fix oil and gas prices. By having controls over production, OPEC could regulate the market prices and enjoy bigger profits than if its member countries sold oil individually at the going rate. OPEC has followed this strategy to operate the oil and gas market since its inception.
Conclusion
Supply, Demand, and Sentiments towards crude oil are not the only determinants of oil prices but demand, supply and sentiments of oil futures contracts traded by speculators. Regardless of how the price is determined, the oil will always continue to be in high demand until it fizzles out in the future.
