Changes in oil price
The crude oil market is a highly volatile industry that gets affected by various factors. Among the most significant influencing elements is the global political environment as well as the forces of demand and supply. The political climate gets driven primarily by the Organization of Petroleum Exporting Countries and the United States of America. OPEC countries control over forty percent of global oil production, and their activities possess a significant impact on the prices of oil. For example, the sustained increase in oil supply since 2015 led to the oil crash of 2015 after OPEC countries refused to cut production. This event, coupled with the all-time high shale oil production in the United States, resulted in the fall of oil prices from over one hundred dollars to around fifty dollars a barrel. The supply and demand also get affected by OPEC, although the futures market mainly drives it. The futures market enables consumers to buy oil at a predefined future date using the current oil prices. This speculation means that if the costs are expected to rise, purchasers may decide to buy more now to guard against the expected increase. This speculation affects the price as demand increases. Natural disasters, as well as global tensions, also play a crucial role in determining the price of oil. This paper aims to analyze the changes that occurred in the crude oil prices in 2019 and factors contributing to these changes.
The crude oil industry prices have lost the gains made during the end of 2018. Global crude oil prices in 2019 averaged fifty-six dollars and eight-two cents per barrel, down from sixty-four dollars and ninety cents per barrel in 2018. Brent crude, the international benchmark in the crude oil industry, traded at an average of fifty eight dollars and twenty-four cents in 2019. U.S West Texas Intermediate, on the other hand, averaged around fifty-two dollars and fifty-six cents. Brent crude prices fell from approximately eight four dollars per barrel in 2018 due to fears of a repeat increasing supply and stuttering demand (U.S. Energy Information Administration (EIA), 2019). Oil sold by Organization of Petroleum Exporting Countries in 2019 was around sixty-three dollars and ninety-two cents, a decrease from sixty-nine dollars in and seventy-eight cents the previous year. However, the prices of crude oil coming to the end of 2019 have begun to rise again, with a two percent increase witnessed in December 2019. This increase was after OPEC, and its allies agreed to cut production of oil by five hundred barrels daily.
Demand and supply play a crucial role in setting the prices of crude oil. The supply and demand theory suggests that an increase in the amount of a commodity should lead to a reduction in the price and vice versa. It also states that an increase in demand ought to translate to higher rates. However, the price elasticity of demand for oil had significantly changed since 1973, when oil prices witnessed a sharp rise (Metwally and Arab, 1987, 53). Oil is nonetheless a necessary product with a price elasticity of less than one. Policies adopted by countries importing oil to increase storage and reduce consumption have contributed to the growth in price elasticity of demand for oil. This rise in price elasticity of demand has also gotten driven by the increase in oil suppliers over the last thirty years or so. For example, the sustained growth in shale oil production in the United States led a surplus in the supply of oil in the market, forcing the prices to go down significantly. In early 2019, in attempts to counter this increase in supply, OPEC and its allied producers decided to cut the production of oil by over one million and two hundred thousand barrels daily to try to drive the prices up through balancing of the supply and demand curve. The figures below show how changes in demand influences change in price.
Figure showing the effect of supply and demand on the price of crude oil.
The single most potent force influencing the crude oil market is the Organization of Petroleum Exporting Countries and its allies. The Organization of Petroleum Exporting Countries is a powerful cartel made up of over seventeen countries that produce oil. This organization consists of oil-producing countries with extensive reserves, and this has always enabled the group to impose its price-making authority in the crude oil market (Bandyopadhyay, 2019, 18-21). However, OPEC has been claiming that it has lost its power to alter crude oil prices in the recent past. The most dominant member of OPEC is Saudi Arabia. The country controls around a fifth of the world’s proven petroleum reserves and is the biggest exporter of oil, according to OPEC (Organization of the Petroleum Exporting Countries, 2019, Paragraph 2). The country with the most effects on oil prices outside of OPEC with its unparalleled global power and foreign affairs policies. It is also the biggest consumer of oil, and its policies have a significant result on oil prices.
According to the National Bureau of Economic Research, income elasticity or the reaction of demand for crude oil to changes in income is more straightforward to estimate than the price elasticities but is also less than one. As indicated by the monetary hypothesis, three confinements of the time path of raw petroleum prices ought to hold in balance. These restrictions include those emerging from the capacity exchange, financial futures contracts, and oil is an asset that can get depleted (Nesvisky, 2019, paragraph 4). These factors link the spot price of oil today to the worth that market stakeholders anticipate that the cost should be later on. The present value of a stock reflects what individuals expect about future profit, predicting stock prices actual change very hard to foresee. Therefore, the current cost of oil ought to reflect desires for future essentials, making changes in the cost of oil challenging to anticipate. The expansive developments of the value of oil and oil prospects contracts are predictable with these hypothetical limitations.
The demand and supply of crude oil in 2019 got affected by a myriad of factors. The most significant factors that led to the fluctuations in crude oil prices in 2019 are the geopolitical elements. Global tensions dominated by the US-China trade war, United States sanctions on Iran, the rising US tensions with Venezuela as well as an attack on oil storage in Saudi Arabia all affected the price of crude oil in 2019. The trade war between the United States and China (the largest importer of crude oil) has negatively impacted the demand for oil. This impact came about as tariffs got imposed on all Chinese goods and products going to the USA. The trade war meant China had to cut production levels leading to consumption of lesser energy and ultimately, crude oil. This increase in demand translated to an increase in supply as well as uncertainty in the market, leading to lower oil prices. The attack on a refinery in Saudi Arabia also led to a slight increase in demand and a fall in supply, making prices to hike for a short period. All these factors join to form the basis for the setting of oil prices in the year 2019.
Bibliography
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