What Factors Determine Crude Oil Prices?

Crude oil prices are primarily determined by something called commodities futures. Investors look at the factors that may affect the value of oil and decide at what price they will buy or sell oil in the future. There are usually three main factors that investors look at when trading futures to help them determine what crude oil price they are willing to pay. How much oil is available in storage, the current output of oil, and the expected demand for gas and oil all figure heavily into determining crude oil prices.

The Organization of Petroleum Exporting Countries (OPEC) is a group made up of the 12 highest oil producing countries in the world. Between them, these countries control about two-thirds of the world's petroleum. This organization is responsible for almost half of the world's oil exports. OPEC works to make sure that the supply at any given time is limited enough to keep the price of oil from dropping. If the oil supply is too abundant, the price typically drops. A limited supply usually means higher prices.

OPEC is not the only factor that affects crude oil price today. When people buy gasoline or petrol for their automobiles in higher than normal amounts that means there is an increased demand. When the economy is sluggish and inflation is high, however, this drives the cost of most goods like food higher. People tend to spend less on gas and save more money instead. This drops the demand for oil, which generally causes prices to fall.

The economy can affect the price of commodities like oil in other ways besides basic supply and demand. When the commodity trading investors look at factors like the global economy and politics to try to guess what crude oil prices will be, their decisions can have a huge effect on the price. Crude oil prices can change drastically every day depending on what happens politically and economically around the world. Investors adjust the amounts they'll invest by watching current events and trends. Many other things like upcoming cold weather that will increase the demand for heating oil affect prices. The weakness or strength of the US dollar against other global currencies can also change the cost of oil quickly.

The amount investors are willing to pay for a barrel of oil in the future is essentially a highly educated guess about the upcoming supply and demand of commodities like sweet crude oil. The cost of oil affects not only gas and heating oil prices but the cost of other consumer products, as well. Crude oil prices that go up raise the cost of transporting all goods. Other industries watch oil futures to help them determine whether their prices will need to go up or down to offset those transportation costs.