Factors that affect the price of oil

Crude oil, or “black gold,” is one of the world’s most precious commodities. Price changes in the commodity can affect the economic ecosystem at every level, from family budgets to corporate earnings to the nation’s GDP. Indeed, sudden price drops or unexpected spikes can send global financial markets into a tizzy.

Crude oil prices change quickly in response to news cycles, policy changes, and fluctuations in the world’s markets. Since 2014, oil prices have experienced a downward journey, falling from highs of around $115 per barrel. In February and March of 2020, crude prices accelerated their decline in reaction to the coronavirus pandemic and an expected sharp drop in demand for oil. In addition, major oil producers failed to come to an agreement on production cuts, exacerbating the problem. By mid-March 2020, the price of US crude oil was fluctuating just around $19 per barrel.

 So, what causes these dramatic swings in the price of oil, and what can we expect going forward?

For several decades, the Organization of Petroleum Exporting Countries (OPEC) has been the elephant on the world’s trading floors, with its oil-producing member nations working together to determine prices by boosting or reducing crude oil production. While OPEC’s grip on the market has loosened some in past years, its decisions continue to play a dominant role. OPEC’s every move is watched closely by governments, oil companies, speculators, hedgers, investors, traders, policymakers, and
consumers.

OPEC’s policies are affected, in turn, by geopolitical developments. Some of the world’s top oil producers are politically unstable or at odds with the West (issues pertaining to terrorism or compliance with international laws, in particular, have been problematic). Some have faced sanctions by the US and the United Nations.

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