What Causes Changes in Crude Oil Prices?


Quick Answer

Crude oil prices change as traders try to predict future crude-oil supply and demand. If demand outstrips supply traders will find buyers willing to pay high prices for their oil, but if supply outstrips demand traders have to sell oil at a discount to find a buyer.

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What Causes Changes in Crude Oil Prices?
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Full Answer

Supply of oil is influenced greatly by the Organization of Petroleum Exporting Countries and their production quotas. OPEC countries often reduce production to keep supply in line with demand, keeping prices high. However, as the result of technological advances, such as hydraulic fracturing, U.S. oil production increased significantly between 2011 and 2014, causing an oversupply of oil. OPEC did not reduce production, and crude-oil prices fell significantly.

World crises and natural disasters also cause fluctuations in oil prices. For instance, unrest in the Middle East often causes oil prices to rise if speculators expect the unrest to disrupt oil production. Hurricane Katrina caused oil prices to rise after it reduced output from damaged Gulf of Mexico oil refineries.

Market sentiment, the overall opinion traders hold, affects the price of oil greatly. Sometimes the overall market sentiment magnifies the basic effects of supply and demand, creating large price fluctuations as traders try to quickly buy or sell oil futures in anticipation of future events. These fluctuations are often subject to future corrections if the market's sentiment was wrong about anticipated events.

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