What Factors Determine Oil Prices?

Whether it’s up or down, the price of oil is a hot-button issue for Canadians.

Canada holds 13% of global oil reserves, the world’s third-largest share after Venezuela and Saudi Arabia, and the national economy relies heavily on this non-renewable resource. As the price of oil has plummeted, Canada’s economy has followed the same downward trend, with an increase in EI claims across the country and the loonie reaching record lows.

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While oil is one of the most important commodities in the world, it is also one of the most volatile in terms of price. There is a great deal of confusion among the general public regarding the factors that influence the price of crude oil.

Unlike most products, oil prices are not determined entirely by supply, demand and market sentiment toward the physical product. Rather, supply, demand and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination.

According to the Government of Canada, the price of oil is set in the global marketplace. Oil is traded widely all around the world and can move from one market to another easily by ship, pipeline or barge. Therefore, the market is worldwide and the supply/demand balance determines the price for crude oil all around the world. If there is a shortage of oil in one part of the world, prices will rise in that market to attract supplies from other markets until supply and demand are in balance. If there is a surplus in a region and the price drops, buyers will soon be drawn to that market, which explains why crude oil prices are similar all around the world. Prices vary only to reflect the cost of transporting crude oil to that market and the quality differences between the various types of oil. The global nature of the market also explains why events anywhere in the world will affect oil prices in every market.

An infographic created by CME Group, an American futures company and one of the largest options and futures exchanges, details several other factors that impact the price of crude oil.

infographic-whats-behind-oil-prices

CME Group – Ensuring Effective Market Place

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