Oil is a vital commodity in the world. What affects its price? The price of the oil is driven by two key factors, supply and demand. When the supply of the oil into the markets increase, the price will fall. When the supply decreases, then the oil price will rise.
The supply is driven by three factors.
- OPEC:
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Non-OPEC : - Exogenous shocks:
OPEC stands for The Organization of the Petroleum Exporting Countries. The OPEC has fourteen members and sets production quotas for them. Hence, it controls the supply of oil the world markets.
It consists of America, Canada, Russia, and China as members and produce a significant number of barrels every day. Hence, it controls the supply of oil, which has an influence in the global oil prices.
When Hurricane Katrina stuck the American coast, it disrupted the oil supply lines, and caused an oil crisis in America.
Demand for oil causes the price to increase. And less demand will see the oil price to fall. It is driven by three factors.
- Global Economic Performance:
- Alternative Energy Sources:
- Strength of the US dollar:
As strong demand for oil comes from US, Europe and China, an economic slowdown will cause a decrease in demand for oil. And the price will fall.
The development in the alternative energy supplies such as solar, wind, etc. will decrease the demand for oil in the coming years.
The oil is priced in US dollars. Hence, a strong dollar will cause the price of the oil to fall. So, the US dollar can act like a fundamental driver behind oil sometimes.