Oil Trading

What determines the price of oil?

Oil is one commodity that is traded globally. The natural energy that comes from the earth, known as crude oil, can be found all over the world. Some of the top oil producers are the United States, China, and Russia. Often times, a business or government entity will enter a contract agreement to pay a certain price for a supply of oil from one of these sources. The prices are always changed due to market supply and demand, market sentiment, and technological advancements.

The demand for oil comes from its many uses. Oil is used to heat our homes, create motor and diesel gasoline, and to create products such as plastics and ink. During the winter months, demand for oil rises due to the need to heat our homes and businesses. This increase in demand and oil consumption will cause oil prices to rise. The supply of oil is based on how much oil is being produced at each refinery. The supply from a refinery can change when companies merge, or when a technological advancement is implemented to increase productivity.

Market sentiment is a term that describes the overall feeling of the investment community. Basically, if the majority of investors feel the market for oil will drop in prices, the next contracted price for oil will be of a lower price. The actual price of the oil is based on a futures contract, which states that oil will be priced by the barrel, at a predefined amount, starting at a future date. Market sentiment plays a key role in pricing the oil due to the competitive nature of the investment community.

New technologies result in a lower oil price because innovations in machinery lead to more oil being pumped and produced. Finding the oil in the first place is just as important as pumping it efficiently. Geologists now use satellite images to study the earth`s surfaces and determine where oil can be found. Computers are used to process data collected about the natural resources in an area. Once the oil found and processed, the oil is accounted into the global supply, and the process of pricing the oil starts all over again.