Energy Basics: Fluctuations in the Price of Oil

Hurricane Dean made its way through Mexico for the second time and has been been downgraded from a monstrous category 5 hurricane to a more manageable category 2. Many people in Texas, Oklahoma, and Mexico breathed a sigh of relief as none of us want to see another Katrina or Rita. Asides from the National Hurricane Center and the residents that would be affected by Dean , oil investors also keep a close eye on hurricanes. Hurricanes that go through the Gulf of Mexico may disrupt refining, exploration, or production of oil. Companies like Exxon (XOM), Valero (VLO), and British Petroleum (BP) all may be forced to cut production on a major scale which would lead to an increase in oil prices.

Straightforward supply and demand of oil does not necessarily dictate the price of oil which currently stands at $69.26 per barrel. An actual threat to oil supplies does not even need to exist, only the anticipation or concept of a threat happening is enough to bolster oil prices. The latest news headlines at CNN or Fox News have an effect on oil prices whether it’s about the health of the Iraq war, weather, or relations with Iran. Many energy analysts claim that the price of oil should be lower but about $20 of the current price is expectations of worldwide political turmoil.

Finally, when analyzing oil prices you cannot forget about the influence from the Organization of the Petroleum Exporting Countries (OPEC), an eleven nation oil cartel including Iran, Saudi Arabia, Kuwait, and Nigeria. The primary goal of OPEC is to negate unnecessary fluctuation in the price of oil while creating a level of oil stability. At the same time, OPEC makes sure to keep in the mind the financial interest of oil producing nations. Recently OPEC came out in saying that they would like to see oil not top $80/barrel, but would be very concerned if oil dropped below the $50 mark. Therefore, they believe they have created a foundation for oil to fluctuate in a $30 range, without disrupting worldwide economic growth, barring any extraordinary global events. Below is some of the key news that oil investors look to in deciding whether to buy or sell oil commodities.

Causes of an increase in oil prices:
– Hurricanes that disrupt the oil infrastructure or delays oil production in the Gulf of Mexico
– Terrorism (especially on US soil)
– Extremely hot summers and chilly winters
– Geopolitical influence
– Strong economic growth (with a careful eye in China & India)
– Kidnapping of oil workers in Nigeria

Causes of a drop in oil prices:
– Unexpected increases of oil stockpiles
– Warmer than expected winters
– Majors moves to alternative fuels
– Peace in the middle east
– Gasoline conservation

Hurricane Dean may have not caused the price of oil to spike in the recent week but bear in mind, hurricane season did start June 1, but it doesn’t end until November 30.

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2 Responses to Energy Basics: Fluctuations in the Price of Oil

  1. tao2death says:

    What about Beijing taking 800,000 cars off the road for 3-days? Never discount Supply and Demand. No matter how strong the cartel, someone is going to get greedy and produce more oil to take advantage of the higher price, thus driving the price down.

  2. haystackfarmer says:

    Taking 800k cars off the roads for 3 days is a lot easier said than done. Imagine taking that many cars off California for 3 days….not gonna happen. People have to work and cars get people to work. But oil prices between $50-$80 seems feasible. I don’t really see it going back down to $20-$30/barrel any time soon based on all the reasons stated above.

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