The Causes Behind Oil Stock Fluctuations
Commodities, such as oil, gold, tea, and such are physical substances and thus are more susceptible to the various effects of the natural and man-made world on them. Commodity traders all understand that they will experience more fluctuations on the prices of their holdings than they would if they held bonds and stocks, but many will argue that greater risk (fluctuation) equals greater rewards.
Looking at oil specifically, there are plenty of factors that impact the value of oil stocks in international exchanges and markets. These are what we will be looking at here. Before diving in, it’s prudent to keep in mind that commodity prices obey the simple cardinal rule of supply and demand – what we’re looking at here are basically some of the factors that influence the levels of either of these two essential qualities, in no particular order of importance.
OK. Let’s get into it.
Organization of Oil Producing Countries (OPEC)
Historically speaking, it cannot be denied that OPEC is the most substantial determinant of the prices of oil stocks in the world. The organization was created in order to introduce some measure of coordination in the global oil industry by bringing together different oil producing countries so that they can regulate oil supply levels, thereby avoiding catastrophic collapses or unsustainable gains.
The 14 member countries are Angola, Algeria, Equatorial Guinea, Ecuador, Gabon, Iraq, Iran, Libya, Kuwait, Nigeria, Qatar, the United Arab Emirates, Saudi Arabia, and Venezuela. Combined, they have control over a whopping 40% of the world’s oil supply.
In keeping with their policies, or global market conditions, they are able to come together and decide whether to increase or decrease the supply of oil on the world market, effectively influencing the price of oil stocks. With the decreased reliance on Middle Eastern oil by the USA in the wake of their recent advances in oil extraction, OPEC nations have less ability to cause international oil market catastrophes on their own.
Weather Changes
It might not seem like a likely inclusion in this list, but weather actually plays a role in oil stock prices. In times of extreme weather such as freezing winters or hot summer months, people’s air conditioning and heating requirements will increase accordingly. Both of these are reliant on oil, and so an increase in their demand translates into an increase in oil demand, thereby raising the price of oil stocks.
Renewable Energy
As the world grows more and more conscious of its responsibility towards the environment and its responsibility to keep it viable for future generations, the uptake of renewable energies has been on the rise. One of the major disruptors of the status quo on the horizon is the electric car, which has seen a great deal of innovation in recent years as battery technology grows more efficient. Electric cars can go faster, for longer distances, and with less charging time than they could before, and as these advancements continue to erode our demand for oil, oil stocks will see a drop in value.
Political Instability
Oil stocks are very sensitive to the political climate of a country, as the steady production and delivery to global markets is so heavily reliant on a sound infrastructural and political environment. The slightest hint of possible disruption in a large oil-producing nation is enough to send prices skyward. A recent case would be the strikes by oil-field workers in Nigeria, or the war-jitters of 2008 when Iraq and Afghanistan were on a war footing.
Economic Growth or Shrinkage
As might be expected, booming economies have more use for oil than stagnating ones. In strong and stable economies, industries, motor vehicles, and all sorts of assorted amenities will make use of oil to function, and this will keep up a strong and steady demand for it. Prices will, therefore, maintain an upward trajectory unless supply keeps up.
In Conclusion
As we mentioned earlier, oil as a commodity abides by the rules of supply and demand, meaning that the causes of fluctuation in the price of oil stocks might be easy to identify or even predict, but rather difficult to influence. This is what traders in oil stocks are challenged by, and what makes the oil markets such an interesting field to operate in, for those that relish a challenge.
■ Black Gold Blues: The Causes Behind Oil Stock Fluctuations
TradingCenter Blog (2018)
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