By Jared Cummans
By now, crude’s popularity has been exhausted. As arguably the most widely used commodity in the world, crude oil has cemented its place into societies all across the globe. It makes an appearance in everything from your standard fuel at the pump, to even plastics and cosmetic products. As such, oil has also grown to be one of the most dominant assets in the financial world. Crude is currently the most heavily traded commodity and is one of the most liquid assets an investor can establish exposure to. Its volatile daily movements and heavy ties to the economy make it a prime target for active traders of all kinds.
But keeping up with crude’s movements requires a sound understanding of its underlying price drivers and what makes this fossil fuel tick. Below, we outline four lesser-known factors that culminate to move crude prices on a daily basis.
- Global Economy: This is without a doubt the most important factor driving the price of oil. If the global economy begins to sag, so too will this commodity as it will mean lower demand from consumers. Likewise, when the economy is booming, crude prices are likely to charge higher based off of higher consumption of the fossil fuel. In recent years the global economy has been anything but stable, so giving a prediction for how oil will turn out in the future is relatively impossible; keep a watchful eye on economic developments to stay ahead of the curve. It should be noted, however, that oil prices can also signify where the economy is headed in the coming days, as we watched sky high prices do their part in triggering the 2008 recession.
- Geopolitical Tensions: This has always been a major issue as far as oil is concerned as the suppliers and consumers of this commodity do not always get along. With sanctions on foreign oil as well as a fair amount of political unrest in the Middle East, crude prices hinge on the every development of these nations. We have seen even the threats of war cause a massive premium in oil prices and it will more than likely happen again at some point in the future. Until we (and other nations) can reduce their dependence on foreign imports, geopolitical tensions will remain a major point of contention for oil prices (and WTI as well). Though it may still be a ways off, we have seen evidence of the world’s largest oil reserve lying right here in U.S. borders; the development of this field could be a major factor in future oil prices.
- Emerging Market Demand: One factor that many overlook is the demand from the world’s most dominant countries, like China and India. Though none match the consumption of U.S. oil, their demand for the commodity still has a lasting impact on its prices. In recent years, many have accused these nations of being faced with a slowdown after years of rapid expansion, should that ever occur, demand for oil will likely drop and put a dent in crude prices [see also 25 Ways To Invest In Crude Oil].
- Substitutes: For many years, people have been rallying around the concept of green energy and displacing the foothold that fossil fuels have in our everyday lives. While many argue that this is a long ways off (and others claim it is flat out impossible), substitute products are always in the works and it only takes one breakthrough to permanently damage oil’s price. Already, we have seen a number of green-energy automobiles hit the roads and make a big splash among consumer markets that are striving to hop on the “green” bandwagon. For the time being, most of this technology is too expensive for the masses to adopt, but as we continue to develop alternate fuel sources, it will become readily available to more and more people.
Disclosure: No positions at time of writing.