To know what drives the oil prices all around the world, first we have to understand what oil futures contracts are?
The oil future contracts are agreements to buy or sell a specific quantity of oil at a specific date in the future over an agreed-upon price. Such oil prices are controlled by the traders in the commodity market. This is why oil prices change daily.
Some of the traders represent companies that actually use oil. They buy oil for delivery at a future date at the fixed price. while some traders are actual speculators and their only motive is to make money from changes in the price of oil.
Other Factors that determine oil prices :
One of the most important factor that determine oil prices is dollar since most oil contracts around the world are traded in dollars. This is why oil-exporting countries set their currency to the dollar. When the dollar declines, their oil revenue declines with the costs going up.
A drop in the dollar’s value forces OPEC to cut production. It must raise the price of oil to maintain its profit margins and keep the costs of imported goods constant.
OPEC vs US Shale Oil
When the Organisation for Petroleum Exporting Countries(OPEC) among all 14 member countries decide to reduce their oil production. That’s what caused high oil prices in 2017 and 2018. On November 30, 2016, the OPEC agreed to cut production by 1.2 million barrels per day starting January 2017.
The reason behind such a move was the booming U.S. shale production. OPEC has been fighting a battle with the US Shale oil producers for market share that produced 9.4 million barrel per day in 2015 knocking down OPEC market share by 2.7 percent.
Oil prices in 2016 was reduced by more than half since mid-2014 due to global oversupply resulting in such a move by the OPEC.
Unrest in the World
World unrest also caused high oil prices in March 2011. The investors became concerned about unrest in Libya, Egypt, and Tunisia. Oil prices rose above $100 a barrel in March and reached its peak of $113 a barrel in April.
World crises in oil-producing countries also affects the oil prices. That’s because traders worry the crisis will limit supply.
In January 2012, it was found that Iran was closer to building nuclear weapons capabilities. The United States and the European Union imposed financial sanctions on Iran.
As a result, oil prices bounced around $95 to $100 a barrel from November through January. In mid-February, oil prices broke the $100 barrier.
In July 2006, oil prices also increased $10 a barrel when the Israel-Lebanon war raised the fear of a potential threat of war with Iran. Oil rose from $70 a barrel in May to a record high of $77 in July.
Natural/Man made disasters
Natural and man-made disasters can drive up oil prices. Hurricane Katrina caused oil prices to rise $3 a barrel and gas prices to reach $5 a gallon in 2005. Katrina affected 19 percent of the US oil production. 113 offshore oil and gas platforms were destroyed and 457 oil and gas pipelines were damaged.