Oil is one of the most traded commodities in the world, and its price is constantly on the move. But what makes its price move so volatile?
Supply and demand
Like any market, the single biggest factor that affects oil’s price is supply and demand. The levels of both supply and demand for oil are in constant flux.
The 2008 crash, for instance, brought about a slowdown in industry which in turn lowered the need for oil. Without a similar drop in oil supply, over the next five months Brent Crude’s price went down $100.
Oil supply comes from two areas: OPEC nations and non-OPEC nations. Oversupply by OPEC has been blamed for the near 60% drop in Brent crude’s price in late 2014-15.
There are also several external factors that can affect the supply and demand levels of oil:
Exogenous shocks are unpredictable events that move markets and cannot be explained by economics, and they can have a big impact on both demand and supply of oil. Hurricane Katrina in 2005, for example, caused a spike in the price of oil by taking out a substantial supply line.
Alternative energy sources
Good value alternatives like nuclear power, crop-based oils or wind power could see consumers switch from oil energy, thereby reducing demand. However, this requires a constant supply of energy, delivered at competitive prices.
Oil is priced in US dollars, so the value of the dollar has a major impact in the price of oil. If the dollar becomes stronger, for instance, the price of oil will tend to go down, assuming that all other factors remain constant.
Oil prices are set on the futures markets, which makes speculation about future events that could impact oil’s price is rife. For example, if China chose to build more nuclear power plants, demand for oil could drop substantially. Or an increase in global fracking could see supply rise yet further. A hint of any such situation could see movement in oil’s price.