Factors affecting the prices of Crude Oil

 

1.Middle East Tensions

2.Russia Ukraine War

3.OPEC+ production Cuts

4.China Crude Oil Demand

5.US oil productions

6.Sanctions on Russia, Iran and Venezuela

7. Rise of new players outside OPEC

8.Economic slowdown

9.Rise of E mobility and Renewable sources of energy

10. Tightening of environmental regulations in Europe

11.No recent major oil exploration and ageing oil fields in middle east

 

Crude Oil is one of the most volatile commodities there is. We saw its prices being driven in negative territory during the Covid pandemic and the prices surging to seven year high during the Russian Ukraine conflict. The Prices responding to Middle east tensions in regions surrounding Israel and the same prices getting subdued by worries over China Demand.

 

Let us try to examine the major factors in recent times contributing to the pricing of Crude Oil:-

 

1.      Middle East Tensions

 

During recent past and on the time of writing this article, the tensions over Israel Hamas conflicts have spilled over the region with Iran a major backer of the groups like Hamas, Hezbollah and Houthis has vowed to take revenge on Israel for killing of Hamas leader on Iranian Soil. The oil markets are on the edge over the Iranian threat but it has widely died sown as even in the past the measures taken by Iran has all been to save its face rather than take any decisive action. But well it has added a few dollars to the oil premium and even the market does not know at the moment whether to take Iran seriously or not. The prices are expected to remain volatile over uncertainty of Iran and Iran backed rebel groups even when it is not expected to turn into a full blown war anytime soon. Approach of Israel on the other hand has been quite nerve wrecking for the markets. If the markets are to fear any approach , I will say its Israel rather than Iran.

 

2.      Russia Ukraine Conflict

Ever since the beginning of the Russian Ukraine Conflict, the markets have been on the edge but in recent time the market has shrugged off its influence. While major sanctions trying to cripple Russian Oil dominance and its influence on Europe was forcing the prices up, the Russian Oil supplies to India, China and other developing countries have on the other hand increased Russian revenue and it has prevented any further tightening of the oil markets. Now Russia Ukraine Conflict has become an everyday news amounting to no news.

3.      OPEC+ Production Cuts

With OPEC+ in its recent meeting deciding to continue with the production cuts with an option to rollback some cuts depending on the market situation, the news of possibility of any increased supply has not augured well with the market and has been adding to bearish sentiments. Its quite clear that the world has ample supply of crude at this moment and the OPEC+ cartel has been trying to keep it artificially high but the same may not be possible in the longer run as the countries within the group are unhappy with the export quotas and the OPEC countries being oil dominated economies want to maximise their production. So it will be hard for the Saudi and Russia lead cartel to keep the prices at over $75 when the economic conditions around the Globe are not all favourable.

4.      China Crude Oil demand

The news coming out of China has not been pleasant for quite some time now. The Crude oil imports of China has seen contraction in the months of June and July of 2024. The manufacturing sector in China is also not performing well and the rise of E mobility in China has also contributed to muted oil demand. It is worth noting that China is the world’s largest oil importer and the demand from China is a major concern that has the power to trump every short time tail winds in crude prices.

5.      US oil Production

As per the EIA estimates US oil production is likely to average around 13.2 million BPD which makes it the highest production figure in the history. With the oil prices sitting comfortably over $70 , the shale oil production in US is not expected to see any down turn any soon. The Political turmoil in US is also pointing to growth in US oil production in the coming time.

6.      Sanctions of Russia, Iran and Venezuela

The US sanctions of Russia, Iran and Venezuela has helped to keep oil market over $70. But the sanctions are not expected to last forever and if the oil from the sanctioned nations are released in Oil market. The oil prices will plummet back to around $60.

7.      Rise of new players outside OPEC

With Oil discoveries and development of oilfields outside OPEC and Countries withdrawing from the cartel, we are witnessing a surge in  the oil production outside of the US and the OPEC+ . This is the oil production that no body has control over and the increasing production by these new players have contributed to keeping oil price rise in check.

8.       Economic slowdown

With interest rates at record high around the world, the world is witnessing a period of subdues demand growth although the US economy that seems to be working fine for now has prevented any major shocks to Oil prices, the lingering concerns over China has kept oil prices from sustaining at higher levels.

Other factors that are affecting oil prices, gradually are the rising shift of the countries from conventional fuel based mobility to e mobility or alternate fuels like hydrogen or bio diesel, Tighter environmental norms around the world. The factor that may affect oil in the long term are the ageing and drying oil wells of the middle east and the lack of major oil exploration.

But as we can see at the moment the world is flushed with cheap oil and the factors are not supportive of any sustained oil price rise. Its speculation that drives the prices up but the fundamentals are refusing to provide any support. Its an Oil Market with short sellers are seemingly having a guaranteed win.