Factors affecting crude oil price:

Oil Price Determination: Impact of Demand and Supply

The global oil market prices are primarily influenced by demand and supply forces. The level of
supply is largely dependant on the availability of oil in the reserves. Supply shortage causes an
upward movement in the price pressure.

This may be due to factors such as:

 unplanned refinery shortage

 unforeseen demand increases

 pipeline problems

Supply levels are established by OPEC to a large extent because market demand and
consumption levels in the US influences oil prices drastically. The demand for oil spikes during
peak seasons, particularly during the summers. This is because it is usually the season of winters
and vacations. So, the demand for heating oil escalates.

Oil Pricing: Trading in Oil

Major petroleum exchanges are:

 New York Mercantile Exchange

 International Petroleum Exchange in London

 Singapore International Monetary Exchange

Movements in these exchanges and speculations on oil futures also have a significant bearing on
oil prices.
Other Factors Affecting Oil Prices
Oil pricing is also affected by the following miscellaneous factors, such as:

 Oil extraction and processing costs: Higher costs result in higher petroleum prices.

 Commodity traders are responsible for oil prices by bidding on oil futures contracts.

 Peak oil concerns: Global concern on reaching peak oil (highest extraction point) also
increases oil prices.

 Current supply in terms of output, especially the production quota set by OPEC.

  Oil reserves, including what is available in U.S. refineries and what is stored at the

Strategic Petroleum Reserves.

 Potential world crises in oil-producing countries can also dramatically increase oil prices.

There is rise in crude price in crisis situations like:

Iraq insurgency,civil unrest in Nigeria, Iranian revolution,Gulf war, Israel-Lebanon war, unrest in

Libya, Egypt and Tunisia.

 World crises in oil-producing nations: This leads to huge price spikes as observed in July
2006 during the Israel-Lebanon war.

 Factors affecting refining capacity: Natural factors such as hurricanes and floods hamper
the refining process, especially in coastal reserves. It results in oil price spikes and
directly influences the cost of refining.

 Tightening of world oil market: This happens in terms of lowered inventory.

  Political and Economic Factors: Economic factors generally have a long term effect on
oil prices. However, in the Middle East and Gulf regions, they result in immediate
fluctuations. Political factors have different implications. Expected events do not create
much difference in oil prices but unexpected events do.

 Taxation: Taxes form a considerable component of oil prices. The rate of taxes varies
from country to country and could be as high as 50%.

Oil prices are vulnerable to both supply and demand fluctuations and external shocks that can be
natural, political or economic. In the coming years, this will remain a major challenge to
overcome for both oil producing countries and the world economy as a whole.