Oil is a finite substance, like most natural resources on the planet. So, why do prices go up and down all the time, rather than slowly going up over time as we start to run out of supplies? The fact is there are dozens of factors that can affect the price of crude oil, some of which may seem to have very little to do with oil exploration or energy. Amateur investors who are considering speculating in crude oil need to understand these factors or fundamentals before they end up losing a lot of money by making trades just at the worst possible moment.
As with most industries, the most important fundamental when it comes to oil prices is supply and demand. Demand is not as stable as some investors might expect and supply can be affected by all kinds of external factors. When it comes to trading, investors have to consider both domestic demand, within the US, and global demand throughout the rest of the world. Experts have predicted that demand will soon outstrip supply as countries such as India and China become more industrialized and also have more disposable income to spend on motor vehicles. In the United States, the important information on demand and supply comes in the weekly reports from the Energy Information Administration (EIA), and this organization’s facts and figures have a huge impact on domestic oil.
OPEC, or the Organization of Petroleum Exporting Countries, can affect the supply of oil into world markets, affecting oil prices. Decisions by OPEC countries to restrict exports of oil can easily push up prices in other parts of the world, so investors should play close attention to the results of each regular OPEC meeting.
The political situation in many oil producing countries is not stable and crises or conflicts can affect oil prices as the market anticipates a drop in supply. Prices rose as a result of the recent civil unrest in Libya, while even small incidents such as pipeline bombings can have a significant effect on the global market. Weather, too, can affect oil output in certain regions or countries, particularly those affected by storms and hurricanes. Oil prices even went up during Hurricane Katrina, not only because of increased demand but also because oil tankers were unable to dock safely at US ports to drop off their precious cargo.
Finally, prices can even be affected by the oil refineries themselves. If these important installations need to have repairs done or undergo maintenance, the supply of oil to domestic and global markets is interrupted and the price will start to rise.
Trading in commodities can be risky but can also be very lucrative if the investor understands the market well and knows the signs that usually mean a fall or rise in oil prices is on its way. Unusually, commodities traders also have to be experts in geopolitical risks and even local climates if they want to be good at their job, as understanding the current situation in oil producing countries is essential to understanding the supply side of the market.