The price of oil in the global market is influenced by several factors but it is swayed significantly by supply and demand. This means meeting the needs of oil consumers by supplying them with oil. Because Oil is an elastic commodity, its price is affected each time there are fluctuations in either demand or supply, or both.
In the Demand Side
According to EIA, the world has been consuming (demanding) more oil today than it has in the past 16 years. Thanks to rapid commercialization and industrialization in developing countries, oil is going to be needed to run businesses, fuel their operations, as well as create products and services.
For instance, China has been a voracious oil consumer ranking second only to United States. The EIA estimates that China will consume 3 billion barrels more per day by 2020 than it did in 2012 and accounts around 40% of the demand in the world oil market. Other countries like India and Japan are also increasing their demand for oil.
In The Supply Side
To answer the call for more demand in oil, the suppliers need to work double time. Oil producing countries like Saudi Arabia, Venezuela, Russia, and the US supply the world with oil, but the price can be affected if these countries encounter certain events that affect oil production. In the recent years, the US has surpassed the ranks of Russia and Saudi Arabia and has been producing more of its own oil since the 1970s oil embargo.
However, due to the threat of claiming a bigger market share, OPEC, led by Saudi Arabia, tried to drive US oil operators out of the business by flooding the world market with their oil. By refusing to slow down production, the world has now more oil than it can use and that will impact oil price as well.
Aside from the silent oil price war between OPEC and the US, other internal factors that can affect the supply side are geopolitical conflicts and calamities like hurricanes and earthquakes.
Oil as Elastic Commodity
Oil is elastic in production and demand. Elasticity in production means competitors may provide the capacity to address shortages or overproduction of a product. Elasticity in demand means that the price can go up or down based on consumption, among other factors that affect price.
The last couple of months, oil prices have taken a generous dip. It is now slowly rebounding, but many can only speculate what will happen next. What is more evident is that low prices have helped stimulate the demand for oil. Buying a new car and running more mileage, for example, is a good way to paint that picture simply because oil at the pump has been very low.
But since oil is elastic, new changes in oil price can happen anytime. Whether you’re an investor, an oil trader, or simply a consumer, it is best to be watching the market for any new movements before making a decision that will involve oil and oil prices. Oil prices are volatile, as it has always been, so be wise to spot a good opportunity for your decision and make it work for you.