Outlook On Oil Prices

We have seen how the oil market is described and controlled by factors like Supply, Demand, Refining, Trade and Stocks. The oil market being heavily connected through region-by-region supply and demand, these supply and demand patterns interact to establish the crude oil prices and the prices of its products. This article attempts to describe the broad factors that go into defining the oil prices.

The stability in oil prices recently has been disrupted by a number of factors. The surging demand, refinery outages, and supply cutbacks have all been the cause behind the high oil prices. One sees the pattern of the prices shooting up and then declining again once the supply and demand balance has been reestablished. Prices of oil are good reflectors of both the product's underlying cost as well as market conditions at all stages of production and distribution.

The price of crude oil, the raw material, is established by the supply and demand conditions in the overall global market. The main refining centers: Singapore, Northwest Europe, and the U.S. Gulf Coast play an important role in developing these conditions. The crude oil price forms a touchstone for product prices. On a pre-tax basis, crude oil prices are the most important determinant of petroleum product prices, and often the most important factor in oil price changes as well.

As the oil markets are physically inter-connected, with the supply flowing from one region to the other, the oil prices abroad also have an impact on the local gasoline prices. Current oil prices are a result of thousands of transactions taking place around the world simultaneously. All levels of the distribution chain from crude oil producer to individual consumer have a role to play in defining the oil prices today.

Oil markets are like a global auction -- the highest bidder will win the supply. When demand is high and supply is low, the bidder must be willing to pay a higher premium to capture the supply. When markets are "weak”, with low demand low and high supply, a bidder may wait for possibly lower priced supplies later.

One will come across various types of transactions in oil markets. Contract transactions being the most common; cover most oil that changes hands. Oil is also sold in cargo-by-cargo, and transaction-by-transaction arrangements which is called as "spot transactions." Oil is also traded in futures markets which are designed to distribute risk among buyers and sellers on different sides. Both spot markets and futures markets provide important oil price information for contract markets.

Rising oil prices clearly indicate the need for more supply whereas, the falling prices indicate an abundant supply for the current demand level. Futures markets are also good indicators of the physical supply/demand balance as well as the market's expectations.

Another factor behind the oil price fluctuations are the seasonal changes, an important underlying influence in the supply/demand balance. Crude oil prices tend to be stronger in the fourth quarter when there is a high demand both by cold weather and by stock building. It gets weaker in the late winter as global demand falls with onset of warm weather.

The crude oil prices are subject to a host of other influences. The high demand season, that is, late spring for gasoline and late autumn for heating oil, results in high prices of oil. Patterns of the changing oil price can also vary between regions, controlled by the prevailing supply/demand factors in the regional market. Any unusual increase in demand or reduction in supply gets a large price response in the market.

The differences in regional price movements are critical to the way the oil market redistributes products to re-balance after an upheaval. The price increase in one area demands for additional supplies. These new supplies might come from other markets or through imports. The distance and ease of distribution from the necessary relief supplies results in a high er and longer price spike.

Another reason controlling the oil prices today are the cost differences in different states or countries. State excise taxes, product quality, distance and ease of distribution are important factors when comparing prices between regions, states and even within states. These factors combined lead to fluctuations in the oil prices on a daily basis.

Ultimately, current oil prices can only be as high as the market will support. Areas with a robust market, indicated by real estate values, wages and other measures of economic activity will see a higher oil price. But if the oil prices rise than what the market can uphold, consumers will inevitably seek other substitutes, thus pushing the prices down.

In today’s scenario, it is expected that economic development will raise global energy demands by about 50% in a generation. As the world struggles to increase energy supplies to meet the expanding demand over the next two decades, maximum percentage of oil and gas supply will come from a dwindling number of countries. It won’t be a surprise to see a considerable further upward spike in oil prices. It is really very difficult to visualize the production running ahead of demand for long.

left quote Today, a skilled manager makes more than the owner. And owners fight each other to get the skilled managers. right quote

— Mikhail Khodorkovsky.