Oil is one of the basic global commodities and tends to see larger fluctuations in price than stable investments such as stocks and bonds. There is direct and indirect impact of oil prices fluctuation on the global economy. Therefore, investors track the prices of oil very closely. The fluctuation in oil prices is considered as a dreadful symbol for the global economy as it creates volatility in stock markets and also impacts on the industries negatively. The increases in oil prices increase energy prices, which can cause a ripple effect on almost all businesses.
There are many factors that influence oil prices globally, including demand-supply imbalance, technology, storage of crude oil by richer nations and political issues. Some of the important factors that influence crude oil prices globally are:
1. Production by OPEC
The Organization of Petroleum Exporting Countries (OPEC) is one of the major influence of oil prices fluctuations. Consisting of 13 countries (Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela), OPEC countries control 40% of the total supply of oil. The decision of the consortium to raise the prices or reduce production immediately impacts the prices of oil in the global market.
2. Natural Causes
Natural disaster is another factor of fluctuating oil prices. Many events are witnessed in recent past that drove volatility in the oil prices. For example, the Hurricane Katrina (2005) hit the southern United States affected 19% of the U.S. oil supply, and raised price of a barrel of oil. Similarly, the Mississippi River flooding (2011) also led to oil price fluctuation.
Speculation is another contributor in fluctuating oil prices. Oil producers and consumers store crude oil for immediate future needs. They speculate on the price expectations and sale/arbitrage opportunities due to any unpredictable changes in supply and demand balance. Any change in these inventory levels results in volatility in the prices of oil, which in turn creates ripples in the stock markets.
4. Demand-Supply Imbalances
The increase/decrease in demand or supply is another factor that is influences the prices of oil. Increase in demand motivates to store oil for future use. The possibility of an unexpected scarcity in production can create an expected shortfall.Political instability
5. Political Instability
Political instability in the Middle East (and other OPEC countries) also causes oil prices to fluctuate. For example, unrest in Libya and fears about the wars in both Afghanistan and Iraq has fluctuated oil prices tremendously. Such political instability increases demand for storing oil, driving up the current price.