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What Moves the Crude Oil Futures Price?

crude oil price study

In Daniel Yergin’s Pulitzer Prize winning book about the history of the oil industry, “The Prize: The Epic Quest For Oil, Money & Power”, it is interesting to see how the majority of the world events are tied to oil and crude oil futures price has remained relatively unchanged in the last century.

Crude Oil Is Important For Economies

Energy requirements are so vital to modern nations’ economies that wars have been fought, over oil and that foreign policy in an oil buying nation often is dictated by an oil selling nation. Like other commodities, crude oil prices are determined by market demand.

However, because that demand may far exceed the perception of supply and other factors, both political and operational, the price of a barrel of crude oil on the NYMEX or COMEX in the US or the Brent oil fix quote in Europe can be extraordinarily volatile intraday.

The threat of wars, collusion price fixing, political instability, lack of refining capability, natural disasters, et al. are just as valid today as they have been throughout history.

This volatility poses both lucrative and dangerous challenges and opportunities for the oil futures trader.

crude oil point and figure chart

Crude Oil Is Finite Resource

Although fossil fuels are a finite resource, alternative fuels, except for nuclear, have so far failed to adequately address large consumption needs. Crude oil is still the primary source for refining and/or manufacturing heating oil, gasoline, lubricants, plastics, kerosene, solvents, paints, and a long list of other products.

Due to political differences with environmentalists, drilling in industrialized nations’ reserves has dwindled, thus making the majority of new crude oil available primarily from the developing world. Saudi Arabia, Iran, Iraq, Nigeria, Venezuela, Libya, Kuwait, Brazil and Russia are just a few of the countries whose oil wealth has dramatically accelerated from exports, as increased demand has spiked oil futures price even higher.

Higher Crude Oil Futures Price

Disruptions in production can result from political tumult, such as what has been seen recent in the “Arab Spring” events in Libya and in the Gulf War of the 1990’s, sabotage, as with the pipeline explosions in Nigeria, or even voluntary collusion of price hiking through OPEC (Organization of Petroleum Exporting Countries) – the Carter administration’s gas line shortages coincided with such a move.

Oil price history charts will show spikes in oil prices that can be pinpointed to global events in any country which supplies oil.

Conversely, for example, oil prices have dropped when warmer winters resulted in decreased demand for heating oil. OPEC will also increase production when its cartel members require greater quotas, which will depress market oil futures price.

Perception Also Moves Oil Futures Price Higher

Another factor is the perception of an oil shortage. For example, there have been recent occasions when gasoline prices have crept higher due to insufficient refinery capacity, rather than a shortage of crude oil. Nevertheless, the perception of a shortage has driven oil futures price volatility, often based on as little as a rumor taken from a partial news item.

China’s economic explosion has resulted in an insatiable thirst for commodities and energy resources to fuel its export driven machine. China’s investments in Africa, Central and South America, and its relationships with oil producing rogue nations like Iran have driven oil markets higher while the potential political and military ramifications of these moves have exponentially increased price volatility.

China’s own oil interests in the Spratly Islands will inevitably lead to future disputes with Vietnam, Russia, and the Philippines, with military action a distinct possibility.

Daily Crude Oil Prices (NYMEX)

Highest Oil Futures Price To Date

Oil prices reached an all time high in July of 2008 of 145, during the height of the banking crisis. Indicative of the volatility of oil, it traded as low as 36.51 just six months later, in January of 2009, after President Obama was sworn in and the Arab nations anticipated a greater level of cooperation from the US in Middle East affairs.

Although not for the faint of heart, oil futures trading clearly has enough volatility Delta for speculators and traders to satisfy their risk/reward criteria, although in the long run, the interests of the global economic markets are best served by greater stability.

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