Factors That Influence Pricing Of Oil And Gas
Oil and gas plays a key role in running our world, from powering homes and businesses to keeping the transportation infrastructure running. Our lives wouldn’t be the same without oil and gas.
Consumers can easily spot price fluctuations within the oil and gas industry, from filling up our tanks at the gas pump or sticker shock on our utility bills during the winter and summer months. These price changes may seem meaningless at times, however, several factors influence increases and decreases in oil and gas pricing. There is more to it than supply and demand.
If you are considering investing in crude oil, understanding the factors which affect oil and gas prices will give you a more solid foundation for your investing activities.
There are four primary factors that affect the price of oil and related products worldwide. These factors include:
As with any commodity, one factor that dictates price is demand. The world demand is around 90 million barrels per day for crude oil. Many countries have fuel subsidies for their residents. This can be good or bad. It’s especially bad when a company is forced to sell at a loss.
Supply has an effect on price. Supply is usually kept slightly below demand by about one million barrels per day.
Quality of Oil
The quality of the oil affects its price. Higher quality crude oil is easier to refine and meet environmental requirements. You may have heard of this higher quality oil referred to as ‘sweet crude.’
Speculation gets a lot of the blame for the high gas prices we all face. Experts disagree on how much speculation affects the price of gas and oil. But the trading of oil futures certainly has an effect.
Demand for Oil
Like other industries, the demand for crude oil affects overall pricing. Demand for oil continues to grow globally, particularly for transportation needs. China, India, and other countries are seeing increasing numbers of vehicles on the road due to an expanding middle class. More vehicles on the road means those countries will consume more gasoline, which increases demands for crude oil.
Despite increasing costs due to the rising demand for oil and gas, most consumers do not change their usage habits. While the demand may decrease slightly when gas prices increase, most people continue using petroleum products, keeping the overall demand relatively high.
Alternative fuels, fuel-efficient vehicles, and other methods of decreasing fuel consumption are typically slow to affect change and have minimal impact on the overall demand for oil. Even when individuals lower fuel consumption with these methods, the increased number of consumers using gasoline prevents a decrease in demand.
During certain times of the year, the industry can see a temporary increase in demand, which drives up the oil price per barrel. For example, cold winter months may force an increase in gas and oil prices due to the increased consumption of heating oil for homes and businesses. During the summer months, more people tend to travel, which causes an increase in demand for transportation fuels.
Temporary Price Fluctuations
Despite the vast number of influences on the pricing for oil and gas, the good news is the overall balanced price of oil. Weather, political disturbances, supply problems — these factors may increase or decrease pricing for a short time. Once oil reaches normal supply and demand levels, prices will level out. The length of time it takes for the price leveling to occur depends on the issue(s) that initialed the imbalance and the time that it takes to address the issues(s) which affected pricing.
Investing in Oil and Gas Drilling
Crude oil investing always comes with a certain amount of risk, however, it also comes with the potential for high returns on your investment.