Crude Oil Prices Explained

Increased U.S. oil inventories, weak Chinese economic data, and the ceasefire in the Middle East contributed to the cooling of crude oil prices.

The American Petroleum Institute (API) trade group data revealed that oil inventories increased by 0.347 barrels, defying the forecasted 2.8 million barrel decline. On the other side of the world, the global market continues to monitor the easing supply concerns in the Middle East after Israel accepted a proposal to discuss disagreement with Hamas.

On the demand side, China’s economic data translated to softer demand for oil. Similarly, subdued fuel demand in the U.S. led to the lowest heating oil futures. 

Why are crude oil prices fluctuating?

1. OPEC and Geopolitics

The Organization of Petroleum Exporting Countries acts as a crude oil production regulator and country members are the top crude oil producers.

Russia’s invasion of Ukraine prompted the EU and the U.S. to sanction the formers’ products, specifically crude oil and petroleum exports.

On the other hand, OPEC+ surprisingly cut oil production by 2 million barrels per day, reducing supply. Russia announced to deepen its crude production cut (also Iraq and Kazakhstan) until the 3rd quarter of 2025 to compensate for its OPEC+ quota. Thus, this diminishing supply will influence crude oil price fluctuation.

2. Economic Growth

The re-opening of the Chinese economy to the international markets spurs the increasing demand for oil products as its industrial, transportation, agriculture, and commercial operations are in full swing capacity.

However, the country’s current economy (deflation) coupled with property development failures slowed the global economy which also affected commodity value, including crude oil prices.

3. Political Instability

Generally, most of the crude oil reserves are located in politically unstable oil-producing regions such as Iraq, Iran, and Kuwait. Such political upheaval and chaos create disruptions in oil production and transportation which eventually leads to an increase in crude oil prices.

4. Financial Crisis

Oil and gas exploration contributes 3.8% of the global economy. Also, every economic activity relies on fuel. Thus, the demand and marketability of energy heavily depend on how healthy the economy is.

Inflation and recession, particularly in powerhouse countries like the U.S. and China greatly affect the steady demand and supply which channels the need for crude oil prices.

Which variables impact the price of crude oil?

• OPEC and Geopolitics
• Economic Growth
• Political Instability
• Financial Crisis
• Weather Disturbances
• International Policies and Regulations

Where does crude oil come from?

Crude oil is a fossil fuel formed from ancient animals and plants that lived millions of years ago. Extracting crude oil comes with 5 stages:

1. Site Exploration – This involves a site study and survey about the place’s oil capacity. This is typically done by private oil companies and government sectors.

2. Drilling – The drilling rig will be mounted to drill a well on the ground in the potential oil reservoir.

3. Production – After drilling the well, the pump will extract crude oil from the reservoir. The extracted oil is put into pipelines or tankers for processing in storage facilities.

4. Processing – The crude oil will undergo a series of processing such as distillation and cracking to remove impurities such as water and sulfur. The reforming process will produce different types of petroleum products such as gasoline, diesel, and heating oil.

5. Transportation – Transportation and distribution of refined petroleum products to retail outlets such as gas stations for customer usage are the last stages of the crude oil production and supply cycle.

The first crude oil drilling operation was pioneered by the American Edwin Drake in 1859 in Titusville, Pennsylvania. It was successful and sparked oil drilling activity in the U.S. Furthermore, it became an inspiration for the development of the modern oil industry.

Additionally, international crude oil trading began in the early century due to the growth of the automotive industry. Today, the top crude oil producers are the United States, Saudi Arabia, Russia, Canada, and China.

What is the future price of crude oil?

Crude oil prices always show price volatility in the market. One determining factor is global supply and demand yet there are rising and common attributes that affect its value fluctuation.

While it is currently down due to the financial crisis in the U.S., the declining European market, the deflation of the Chinese economy, and the reopening of its top refinery, its prices will likely soar as top-producing countries extend their oil supply cuts.

Furthermore, the geopolitical tensions in the Red Sea will affect the global supply chain as it’s one of the busiest waterways that link between Europe and Asia.

Since oil is a non-renewable energy source, fossil fuel demand will stretch from medium to long-term leading to a slight increase from the current price of $97.60 in 2030.

This prediction centers on the current economic, financial, political, and sustainable issues of the global market and will change according to the dominant price predictors over time.