As one of the world’s most precious commodities, price changes can affect the economic ecosystem at every level, including corporate earnings, a nation’s GDP, and family budgets. Sudden price drops or unexpected spikes often cause chaos in global financial markets, but you can typically expect prices to change quickly in response to the news, government policy changes, and fluctuations in the international markets. So, what causes the price of oil to have sudden price drops or unexpected spikes?
Current Supply
Current supply means the total world output, and OPEC, the Organization of Petroleum Exporting Countries, produces about 40% of the world’s crude oil supply and, as a result, has a controlling say in the prices of oil globally by working with oil-producing member nations to determine prices by boosting or reducing crude oil production. The Organization of Petroleum Exporting Countries grip on the oil market has loosened in past years, but its decisions continue to play a dominant role in oil prices.
Over-production during current supply can have a dramatic impact on the oil prices; for instance, between 2011 and 2014, the U.S. shale oil production went from 1 million to 4.8 million barrels per day, and this created an oil glut, which means there was more oil being produced than in demand. As a result of the increased oil production, prices of imported crude oil went down to $27 per barrel in the U.S. during 2016.
In 2019, shale oil production had reached 8 million barrels per day, causing average per-barrel oil prices to come to $58 for the year. Productions fell to 10 million barrels per day in May 2020, rising to 11 million by July, and fluctuated between 10 and 11 million through October until productions reached over 11 million from November 202 until the end of January 2021. From February 2021, production dropped to 9.8 million barrels per day and later increased to 11.2 million barrels per day in May 2021. As a result of the fluctuated productions, prices also changed rapidly in response to the supply line availability.
Future Supply
When it comes to future supply, access is dependent on oil reserves, which includes what is available in U.S. refineries and the strategic petroleum reserves. Typically, the oil reserves can be accessed quickly in order to increase supply for many reasons such as the oil prices getting too high, reduced oil flow as a result of natural disasters, or if there is an increased need for oil, based on the Energy Policy and Conservation Act of 1975.
Demand
In order to determine the demand for oil in any country, market traders look at the global demand for oil, particularly from China and the United States. The Energy Information Agency provides demand estimates for the U.S. on a monthly basis, and typically governments can expect demand to rise during summer as it is the peak driving season and fall during winter as the roads become treacherous. In order to predict the demand for oil, traders use the travel forecasts from the AAA to determine the use of gasoline during summer. However, in contrast to the summer months, weather forecasts are used to determine the demand for oil during winter.
