After taking a look at the influence of OPEC decisions(Part 1/3) in the price of Crude. Here let's talk about two more factors - " Impact of Supply and Demand" and "Poor Data or Information"
2. Impact of Demand and Supply
The global oil market prices are primarily influenced by
demand and supply forces. The level of supply is largely dependent 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.
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.
3. Poor Data
Although oil prices have become more transparent
over the years, information about crude oil consumption and production has not
improved both in quality and timelessness. On the
demand side, data on the consumption of oil, even those for OECD, are
uncertain, subject to major revisions, and published with a considerable lag.
This problem is becoming worse with the increasing importance of some
developing countries such as India and China as major oil consumers with even
less reliable data.
On the supply side, the dominance of less transparent
national oil companies and the uncertainty about OPEC production levels (OPEC
must rely on ‘secondary sources’ to find out what its own members are
producing) increases the uncertainty about oil production.
Furthermore, the
advent of many small oil producers on the oil scene increases further
difficulty of collecting reliable and timely information. The quality of
inventory data is also subject to uncertainties and revisions.
Since in tight market every barrel matters, uncertainties
about supply and demand contribute to the volatility of oil markets both
through magnifying the oil gap and increasing speculation.Furthermore, unreliable data may induce OPEC to misinterpret the market’s direction and pursue policies that add to the uncertainty and compound volatility.
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