Crude Oil Pricing – Introduction
Crude Oil is one of the world’s most important commodity. The commodity is responsible for virtually all sectors of the economy. For instance, without oil, it would be impossible for other commodities to be produced and transported. The movements on the commodity ends up affecting other asset classes. In the recent past, we have seen the crude prices affect the major global averages. A good example is what happened last week when oil prices edged up by more than 5%. This led to the major averages: Dow, NASDAQ, and S&P to touch their all-time highs. In this article, I will look at the current crude oil pricing and why it matters.
What Moves the Price?
To better understand the concept of crude oil pricing, you need to understand what moves its price. Crude oil pricing, just like that of any commodity depends on the demand and supply. The basic economics 101 topic therefore plays a very important role. It states that when there is an increased supply, the price of the commodity will likely come down. On the other hand, when the supply reduces, the price will ultimately come up.
In the recent times, the world has seen a different oil market from what was the norm. We have seen crude oil pricing reach the high of $143 per barrel. We have also seen the price move to a low of $25 a barrel early this year. This year, the price has moved from $25 to the current $46 range. In the recent weeks, the price has fluctuated between $45 and $53 per barrel.
Last week, there was optimism that oil price would recover after Russia and Saudi Arabia oil ministers said that they would talk in a bid to limit production. Remember that Saudi and Russia are key countries in the oil market. Saudi is a member of the Organization of Petroleum Exporting Countries (OPEC) while oil is the largest non-opec producer. Therefore, if the two countries agreed to limit production, it is expected that other countries would also follow their lead and limit their production. As mentioned before, a limit in the production would boost the oil price.
Unfortunately, during the meeting, the two countries came and announced that there would be no limit. This led to the oil price falling by more than 2% on Monday despite going up by 4% on Friday.
Past & Future
The following few weeks will be very significant for the crude oil pricing. A number of meetings have been organized. Last week, the OPEC president has met a number of ministers from the OPEC countries. He has met the Saudis and the Iranians. Also, in the next few weks, Algeria will host all OPEC member countries to a meeting. Though its not an official OPEC meeting, what will be talked in the sidelines will be very important.
In addition, in the next two months, OPEC will hold its official meeting in Austria. Last year, many people expected the countries to agree on production limit but it was not the case. The challenge is that most countries are not in a position to limit their oil production because their economies depend on oil.
As a trader, you should watch the recent happenings in the oil market carefully. You should also watch out on the official and unofficial meetings by members of the major oil producing countries. In addition, you should watch carefully the weekly releases. The weekly EIA report will be an important tool to help you trade the commodity. An increase in stockpiles means an increased supply and thus a reduction in crude oil pricing and vice versa.