How Oil Prices Are Determined

Crude oil prices have a powerful influence on the global economy.  Fluctuations in the prices of crude oil can send tremors through global stock markets and influence the fortunes of crude oil investors.  Crude oil price hikes have an adverse effect not only on the business and industrial sectors, but also on common people.  It causes inflation, a rise in crime rates, unemployment, and economic imbalance.

Benchmark Pricing

Crude oil is priced on the basis of several factors such as the grade of the oil, its specific gravity, the place where it is produced, the amount of sulfur in it, and so on.  The mechanism used to price crude oil is called benchmark pricing.  This means that the price of crude oil is actually the price of certain varieties of crude oil commonly considered as benchmarks.  The most prominent benchmarks are Brent, OPEC (Organization of Petroleum Exporting Countries) Basket Price, Tapis (Malaysian), West Texas Intermediate (WTI), Dubai Crude, and Minas (Indonesian).  Benchmark prices are also known as price markers.

Brent and WTI: These are important benchmark crude oils in the United States.  Around two-thirds of the crude oil supplies of the world are priced on the basis of Brent.

OPEC Basket Price: OPEC uses its basket price to monitor the situation of the global oil market.  OPEC basket is the average of all the prices of the crude oil produced in the countries that form part of the OPEC.  Currently, these crude oils are Saharan Blend produced in Algeria, Girassol produced in Angola, Oriente produced in Ecuador, Iran Heavy produced in Islamic Republic of Iran, Basra Light produced in Iraq, Kuwait Export from Kuwait, Es Sider from Libya, Bonny Light from Nigeria, Qatar Marine from Qatar, Arab Light from Saudi Arabia, Murban from UAE, and Merey from Venezuela.

Who Sets Oil Prices?

Contrary to popular belief, the companies or the countries that produce benchmark crude oils do not set crude oil or base oil prices.  The agents responsible for crude oil pricing are 3 prominent international petroleum exchanges.  Usually, the prices quoted for transactions on these exchanges form the basis for the prices that people throughout the United States and other countries pay for various commodities, including crude oil.

These 3 petroleum exchanges, along with their website addresses, are:

New York Mercantile Exchange® (NYMEX): http://www.nymex.com.

The International Petroleum Exchange in London (IPE).

Singapore International Monetary Exchange® (SIMEX): http://www.simex.com.sg.

Factors Responsible for Crude Oil Prices

A number of factors are responsible for fluctuations in crude oil prices.  For example, crude oil pricing depends on high global oil demand, limited oil production, and political instability in major oil-producing countries.  Other factors include tax policies, political issues, technological developments, crude oil storage, and many more.

Rising Demand for Oil: Owing to global economic growth, there is a rising demand for crude oil, although the supply level has remained the same in the past decade.  Moreover, there are few refineries to refine crude oil.  Therefore, the difference between the prices of crude oil and the refined products is quite huge.

OPEC: Since the OPEC produces the major portion of the crude oil on this planet, major OPEC decisions with regard to crude oil pricing or production have a huge impact on global crude oil prices.

Nature: Unforeseen natural calamities can cause major upheavals in the price of crude oil.  For instance, if a hurricane hits the major oil-producing countries, one could expect a steep hike in crude oil prices.

Inventories: Oil producers and consumers construct huge crude oil storage tanks for immediate or future use.  These inventories are created in order to either meet future sales opportunities or future demands for crude oil.  When there are changes in the levels of these inventories, crude oil prices fluctuate.  This, in turn, has an impact on the stock market.

Summer: During warm summer months, crude oil prices drop because the supply exceeds demand.  People do not need energy for heating purposes in summer.

Winter: During winter, people require a lot of energy for heating.  This rise in demand forces nations to dip into their inventories.  Since the demand exceeds the supply, crude oil prices rise.

Online Sources for Crude Oil Prices

Oil investors need to know both spot as well as futures crude oil prices so that they can make the right investment choices.  An investor can easily find crude oil prices online.  For example, the Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm) is a good source.)

Brent crude oil spot prices are available at several online sources such as Bloomberg (http://www.bloomberg.com/markets/commodities/energyprices.html) or WTRG (http://www.wtrg.com/).  The futures prices of Brent can be found on ICE Futures at:
https://www.theice.com/marketdata/reportcenter/reports.htm?reportId=77.

Tips for Crude Oil Investors

Crude oil investors can easily take advantage of crude oil price fluctuations in order to make a fat buck.  In fact, daredevil investors such as T. Boone Pickens and others have made their millions speculating in oil.

Here are some great tips for aspiring crude oil investors.

Brokerage Account: Investors can purchase the shares of U.S. Oil Fund (USO).  This agency tracks crude oil prices, and its clients can make profits as per the price of crude oil.  USO charges a nominal fee for their services.

Oil Stocks: Depending on the amount of risk an investor would like to take, he/she can invest either in small oil stocks or in big oil stocks such as XOM (http://www.google.com/finance?q=XOM) and ConocoPhillips (COP) (http://www.google.com/finance?q=COP).

Exchange Traded Funds (EFTs): EFT’s deal with major oil and energy companies.  Major EFTs is OIH, IYE, VDE, IXC, and XLE, and investors have made good profits in EFTs.  For more information visit: http://www.eftconnect.com.

Trading Oil Futures: This is extremely risky and requires plenty of knowledge regarding crude oil.

To conclude, there are two ways to react to a hike in crude oil price.  First, people can spend an abnormally high amount of money on gas for their cars.  Second, people can invest in crude oil and make a lot of money.  Crude oil pricing, therefore, can be converted into a priceless boon.

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