A lot has happened over the past few years with oil price fluctuations. If you are interested in what drives oil prices, this article is for you!

The "black gold”, is one of the most significant and major sources of energy that several essential sectors rely on. Since crude oil is a crucial commodity, it is necessary to know what influences its price because shifts in the price have a significant effect on the global economy.

What Determines Oil Prices?

Oil is the most valuable commodity, used in a wide range of products, including fuel, polymers, and asphalt. Governments, businesses, investors, and traders closely monitor fluctuations in oil prices because the oil sector is a major driver of the global economy. The world economy can experience crises as a result of unpredictable oil price increases because of the variations in demand and supply.

On the other hand, oil is not a luxury good with limited utility that most people can survive without. And due to its abundance and high demand, the oil price is determined by market forces and greatly influenced by traders. And despite ongoing efforts to limit oil use and discover other green energy sources, oil continues to play a significant role in the global economy.?

Also, economic growth is one of the main elements influencing the demand for petroleum products and consequently for crude oil. Energy consumption rises as economies expand, especially when it comes to moving commodities and materials from producers to consumers. Petroleum products like gasoline and diesel fuel are almost entirely necessary for the global transportation industry to function. Fuels are also used in many nations for heating, cooking, or producing electricity and petroleum extensively.

Additionally, the governments and the Organization of the Petroleum Exporting Countries (OPEC) might have an impact on oil prices by setting production targets for its members by influencing trade or changing the amount of oil produced and stored.

If you are considering trading in oil or oil derivatives, it helps to understand what factors drive the oil price and how traders, governments, and consumers influence it.

Factors that affect oil prices:

Many variables affect oil prices, including the basic economic theory of supply and demand. And the following are the three main factors that control and affect the price of oil:

·?????supply?

·?????demand?

·?????geopolitics?

Due to oil's status as a highly sought-after global commodity, there is a chance that considerable price changes might have a major influence on the economy.

Here are the factors that affect the price of oil:

v Supply

As producers pumped more oil than the world could use, oil prices fell drastically. OPEC member nations have traditionally controlled supply, but now the United States is contributing more to supplies.

Additionally, this factor is split into two parts: the current supply and the future supply.?

The current supply is the total world output of oil, and about 40% of the world's crude oil is produced by OPEC, which has a significant influence on oil costs globally.?

On the other hand, the availability of future supplies is also reliant on oil reserves. It includes what's available in countries' refineries as well as in the Strategic Petroleum Reserves.

v Demand

The law of supply and demand implies that prices will decrease if supply rises, which is a pretty simple explanation of the concept of supply and demand. Conversely, if demand rises, so too should prices.

Demand is based on how much oil is needed at any particular time, and frequently that demand is for things like transportation, heat, and energy. Generally, Oil is in higher demand when a region experiences more economic growth.?

v Geopolitics

The sentiment is the other important factor that impacts oil prices. Since oil prices are determined by the futures contracts, market speculation over upcoming events may have an impact on oil prices. The simple expectation that oil demand would rise in the future can cause speculators and hedgers to buy up oil futures contracts, driving up oil prices now.

And vice versa, 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.

v Disasters and wars?

Big oil-producing nations control supply, therefore natural and man-made disasters or conflicts with one of them might affect oil prices. At least in the Middle East and other oil-rich regions, the effects of events like wars, conflicts, natural catastrophes, and political instability can be severe and lead to significant changes in oil prices. So, in other words, if there is war or violence in an area that produces oil, crude stockpiles may claim to be in danger due to the possibility that the supply would be disrupted which could change the price of oil. Since the middle east controls a significant portion of global oil production, a rise in oil prices is highly likely to occur if incidents like those previously stated start to affect infrastructure that is essential to oil production.

Additionally, weather and natural disasters have an impact on oil prices, particularly extreme weather due to the increased demand for the commodity to have favorable weather conditions.