Oil Trades

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 Trades 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 trades starts all over again. Every day in every part of the world, large amount of gas is consumed. The US alone consumed 20,680,000 bbl/ in 2007. This goes to say that huge amount of money also goes to oil trading companies.

Oil has always been considered one of the most important commodities in the global economy. Any slight disruption in the supply of crude oil, for instance, triggers a tremendous global financial market reaction which most of the times leads to oil trading price changes. Oil trades come in different forms. Some oil trading companies are focused only in the exploration and extraction while some venture into refinement and marketing. There are also companies that only do the testing, surveying, drilling and extracting.

There are also business ventures that focus mainly on the distribution of oil. In fact, for non-oil producing countries, importation of refined oils is one of the biggest business opportunities stimulating the economy. Oil trading is such a lucrative undertaking that's why, with the goal of generating oil trading jobs and reducing the need for imports, governments encourage private firms to find oil and gas in their countries. They use a license system where land and sea areas (between 3-12 miles wide) that could possibly contain oil are divided into blocks and are being leased to companies for oil exploration with the use of seismic imaging and drilling.

Oil trading (which starts from exploration) gets the government to benefit from the taxes paid by oil companies in addition to the percentage share they get from any oil produced. For this alone, oil trading has gained a wide recognition making it one of the most sought-after investment in the field of business. While the demand for oil continues to increase, its supply on the other hand is starting to go down the line. This is why oil trading companies have invested much of their time and funds in finding possible additional oil exploration to answer its highly increasing demand.

The current status of oil prices creates different reactions from a diverse concerned group in most oil-importing countries. This makes oil the most talked about commodity currently. In fact, in some Southeast Asian countries like the Philippines, transport groups always go to streets to go against oil price hikes.

The economic importance of oil is the driving force of all oil trading business. Almost anything in our daily lives needs oil. From the food we eat to the cars we drive. From agriculture to electricity, almost everything is dependent on oil. The challenge that we have to face is to survive from the ever increasing price of oil commodity considering that instability of oil prices in the current market.

Oil trading is a highly profitable business if done with great analysis and understanding. Any slight fluctuation in the demand and supply of oil could mean a windfall gain or loss for all of us. The speculation that in the next 10-15 years oil production will continue to dive is a matter that all oil trading firms and every consumer should seriously consider.