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Top 4 Factors That Influence The Valuation Of Crude Oil

By Author: Riya Jain
Total Articles: 2

Crude oil is one of the most important and precious commodities in the world. An unrefined product of petroleum, crude oil is composed of hydrocarbon deposits and other materials that are further refined to produce products such as diesel, gasoline, and petrochemicals. Talking about its price, the pricing of crude oil has a direct impact on the economies, be it the family budgets or a nation’s Gross Domestic Product.

Factors, Which Affect the Prices of Crude Oil

The prices of crude oil are highly sensitive and change quickly due to the policy changes, news cycles, changes in the world market, etc. However, the main factors, which bring an actual change in its prices, are outlined below-

1. Demand
The changing patterns in the demand of the non-OECD nationsare leading to a strong economic growth and industrial production, which in turn boost the overall demand for crude oil. Taking China as an example, it has already surpassed America and has become the largest importer of crude oil and in contribution with the other non-OECD countries; it continues to play a vital role in dominating the overall demand for crude oil.

Other factors, which directly impact the demand for crude oil, are commercial and personal transportation, seasonal changes, and the ever-increasing population. Since the consumption of oil increases during the winters, its demand reaches its peak during this season.

2. Supply
There is no doubt in the fact that since several decades, the OPEC has been the dominating force in the world of trading owing to its 12-member nations which produce oil. These 12 nations work together and determine the prices of crude oil by reducing or boosting its supply. This is the reason why the governments, speculators, oil companies, investors, traders, and consumers watch every move of the OPEC very closely.

On the other hand, the policies of OPEC are highly affected by the geopolitical developments in the world. In the past, a lot of political events have caused supply disruptions and have thus impacted the prices as well. Some of these geopolitical events were Iran-Iraq war, Persian Gulf, and not to forget the Asian financial crisis.

3. Reports
Various reports on spare capacity; production figures, target pricing and investments pay a critical role in the settlement of the prices of crude oil. Some of the reports that are keenly awaited and monitored are OPEC monthly oil market report, American Petroleum Institute (API) Inventory Report, etc.

4. Derivatives
The market is experiencing a hike in the number of participants who are indulged in buying and selling the crude oil in the form of contracts and not in its physical form. Oil producers and Airlines are using derivatives against the swings in the oil prices and speculators are driving the prices upwards and downwards.

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