One of the most common questions that many people have about the oil and gas industry has to do with fluctuating prices. After all, you don’t need to be an expert in petroleum engineering to know that different times of the year tend to cause fluctuations in oil and gas prices — for example, winter heating season can cause spikes in prices, because demand goes up as people start using more gas to heat their homes and businesses. So, what exactly is behind these changes? As it turns out, several factors play into it.
Global supply
A key factor behind fluctuating oil and gas prices is the global supply of these commodities. When there’s a glut of oil or gas on the market, prices tend to fall. The opposite is also true: when supplies are tight, prices usually increase. Another major factor that affects oil and gas prices is speculation. Financial speculators buy up futures contracts and can drive up prices if they believe there will be shortages in the future. Conversely, when financial speculators don’t believe there will be shortages, they can drive down prices by selling off their contracts to other traders.
Global demand
A number of factors contribute to global demand for oil, including economic growth, weather patterns, and geopolitical tensions. For example, when the global economy is doing well, businesses use more energy and transportation needs increase, leading to higher demand (and prices) for oil. Alternatively, if there’s a lot of turmoil in the Middle East or other key producing regions, that can lead to production disruptions and price spikes.
Refining margins
Oil refining margins are what oil companies earn from turning a barrel of crude oil into gasoline, diesel and other petroleum products. They vary depending on the type of crude oil being processed, the efficiency of the refinery, demand for gasoline and other factors.
Historically, refining margins have been relatively stable. But in recent years, they’ve become much more volatile. Some experts blame this on the rise of unconventional crude oils, such as those from shale formations. These oils often require different (and more expensive) processing than traditional crudes, which can eat into refining margins when they’re low. Additionally, when demand for gasoline is high (as it was during the summer driving season), refiners can run their plants at full capacity to maximize profits.
Interaction with other markets
The price of oil and gas is set by global markets, which means it can be influenced by a variety of factors. For example, when the US dollar is strong, oil becomes more expensive for buyers using other currencies. That’s because oil is priced in dollars. A rise in interest rates can also lead to a strengthening of the dollar, and thus higher oil prices.
Speculation
There are a number of factors that can contribute to changes in oil and gas prices. One is speculation – when traders bet on which way prices will go in the future. This can cause prices to go up or down, even if there’s no real change in supply or demand.