The oil commodity market is not any less complicated than the other financial markets. In fact, it is perhaps one of the most difficult ones to understand. There are many factors that determine oil prices at any particular moment. These factors do change with the times, just as circumstances in every other financial market change every year. But there are key issues about the oil commodity market that hardly ever change. These key issues are not constant because they are determined by some other relative factors like economic growth and political situations in oil producing countries. Your Personal Financial Mentor digs a little dipper into the factors that shape the oil commodity market, and explains what you should interpret from present situations in that market.
One important factor, which applies for most other commodity markets, is supply. Supply, in very crude terms, answers one question: How much oil is available? The more the oil, the less the price. That is quite automatic. Therefore when oil producing countries are able to produce more oil into the market, oil prices are bound to reduce. Likewise, when oil producing countries reduce their production to the world market, oil prices will automatically increase. This is one of the core principles of economics: The less there is, the more the price.
However, supply cannot be described without its sister term: Demand. Supply is always relative to demand. In the oil commodity markets, there can be a lot of supply for oil, but if the demand is still more than the supply, then the price will continue rising. In basic financial terms, as long as the supply does no meet the demand, the price will always be high. The supply of oil in the world market is always measured as a function of the total demand for oil.
But what determines the demand for oil in the world market? Well, the most important factors are these: Economic growth and alternative energy. The faster a country’s economy grows, the more the demand for oil will be. If the world economic growth rate is very fast, then it is almost automatic that the demand for oil will rise.
But the demand for is also influenced by the availability of alternative energy. A country that is able to produce nuclear energy, for example, will have less demand for oil.
These are the main factors that influence the price of oil in the world market.
Categories: Oil Commodity Market