Trade Articles

Crude oil is one of the most necessitated worldwide required commodity. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. The volatility of crude oil prices drove many companies away. Therefore, prices have been regularly and closely monitored by economists. Now a days prices have shoot up to record levels of USD 125 per bbl. This is an increase of nearly 70% from that of the previous year. The consumption level of oil is projected to be rise by 1.2 million bbl/d in the year 2008. The consumption of China is presumed to be rise by 0.4 million bbl/d in current year, as it has already registered an increase of 0.8 million bbl/d in march.

Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply. Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. It has been observed that $10 in the crude oil price means decrease in the economic growth of the OPEC countries by 0.5%. This rise in prices account to have more influence on the economic condition of developing countries.

Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The stock exchanges of every country keep a close eye on any up and downward movement of the crude oil price. India fulfills its major crude oil requirements by importing it from oil producing nations. India meets more than 80% of its requirement by importing process. Therefore, any upward and downward motion of prices are closely tracked in the domestic marketplace. Many times it has been recorded that prices of essential products like crude also acts as a prime driver in becoming reason of up and down movement of price.

Keeping in view the conditional status of present scenario, most of the observers at the international arena is much more interested in knowing the current oil price and the outcome of this price burst. These has become a hot bound question in all over world. There tend to be exist two schools of thought. One side argues that high prices are cyclical and arise due to the coincidence occurrence of potentially reversible factors which all are going in the same direction. But the other school of thoughts opine that there is a fundamental structural change in the oil market which is pointing towards the shortage of investment from a decade. Both the thoughts are important. As if the prices are cyclic in nature, there result will not exist forever but if they are structural then they will tend to be stay for a longer time period.

Any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price implies to the higher price of energy, which in turns negatively affects other trading practices that are directly or indirectly depends on it. Crude Oil has been traded in throughout the world and there prices are behaving like any other commodity as swinging more during shortage and excessiveness.

In the short term, price of crude oil is influenced by many factors like socio and political events, status of financial markets, whereas from medium to long run it is influenced by the fundamentals of demand and supply which thus results into self price correction mechanism.

This sustained movement in the northern side underlines some of the fundamental changes in the marketplace. On the demand supply, where in the past the more and more consumption was come from the OPEC countries, especially the US but in today's date much of the incremental demand flow is from emerging economies. Particularly China and India which have recorded more than 40% contribution in the incremental global consumption during the time period of 2000-06. International price of crude oil is projected to shoot up to 100 million barrels per day by 2015.

While demand may touch to a great height, supply will juggle to keep up the pace. The production from existing sources has been reduced by 4% per annum, which implies that around 3 million barrels per day of new capacity is required to be added in every year for offsetting this declination.

There are innumerable factors which influence the price movement of crude oil in throughout the world. Like methods and technology using for increase the oil production, storing up of crude oil by rich and prosperous countries, changes introduced in tax policy, social and political issues etc. In recent years many factors have emerged as the key figures in influencing the price index of crude oil in throughout the world.

The crude oil prices have been buffeted by many factors, which are summarized as below -

• Production: The OPEC nations are the major producer of world's crude oil. Therefore, every policy made by such countries related to the crude oil prices have their influence on crude oil prices. Any decision taken by OPEC nations for increasing or decreasing production of crude oil impacts the price level of crude oil in international commodity markets.
• Natural Causes: In recent years, global community have witnessed many events which in turns have volatility effects on the price level of crude oil. Like hurricane katrina and other type of tropical cyclone have hit the major portion of globe, which as a result driven the crude oil prices to reach at its peak.
• Inventory: In throughout the world, oil producers and consumers get stock their crude oil for their future requirements. This gives rise to speculation on price expectations and sale/arbitrage chances in case any unexpected thing cracks during supply and demand equations. Any upward or downward movement in inventory level shoots up volatility in price index of crude oil, which generates lot of changing movement in sensex.
• Demand: With a sharp rise in economic demand, requirement of crude oil is increasing to manifold in context to the limited supply. The high demand economies of crude oil is putting undue pressure on the available fixed resources. The major gap created between demand and supply of crude oil is forcing the price curve of crude oil to rise in upward direction.

The price structure of crude oil is also influenced by the cyclical pattern. It has been observed that requirement of crude oil got increased during summer season in comparative to the winter season. As any dip in the seasonal temperature increases the consumption of energy for heating purpose in many cold nations. Demand shoots up and thus generates the requirement of tapping the inventories. Similarly, in summer, supply exceeds the demand and petroleum inventories are build up for storage purpose. Henceforth, crude oil prices drop.