Reasons for which the price of fuel oil fluctuates

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Fuel oil is a commodity. Fuel prices are never stable; Like stocks and bonds, prices fluctuate. Fluctuations in fuel oil prices depend on a number of factors, but each country may have different factors. However, some common reasons are mentioned.

> Fuel oil price fluctuates due to various reasons. One of the reasons is the Organization of Petroleum Exporting Countries (OPEC); independent petro-states like Russia; Decisions made by private oil-producing companies such as ExxonMobil.

Note that the petro-state or oil-state is such a state; Its economy is heavily dependent on oil and natural gas extraction and export. And Exxonmobil is one of the world’s largest publicly traded international oil and gas companies.

> Fuel oil prices also depend on demand and supply.

> Production may be disrupted due to natural calamities. Again, due to political instability in oil producing countries, fuel prices are often affected.

> Fuel oil prices can also fluctuate based on production costs and storage capacity.

> Interest rates are often influenced by fuel prices.

OPEC’s role in oil price fluctuations

OPEC or Organization of Petroleum Exporting Countries is the main influencer of oil price fluctuations. OPEC is a consortium. It consists of 13 countries (as of 2021): Algeria, Angola, Congo, Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela.

According to 2018 figures, OPEC controls about 80 percent of the world’s oil supply. OPEC also sets production levels to meet global oil demand. At the same time oil production is reduced or increased. which affects the price of oil.

Before 2014, OPEC promised to keep oil prices above $100 per barrel for the foreseeable future. But by the middle of that year, oil prices had fallen from over $100 a barrel to below $50. At the time, OPEC did not cut oil production, which caused prices to fall as supply increased. In the above example it may seem that ‘OPEC’ is one of the reasons for cheap oil prices. But that is not the case.

Effects of Supply and Demand As with stocks or bonds, the definition of supply and demand in oil has a substantial impact on price. When supply exceeds demand, prices fall; Again, if the supply is less than the demand, the price increases.

Oil prices fell dramatically in 2014 due to low oil demand in Europe and China and stable supply from OPEC. Due to the oversupply of oil, the price of oil fell sharply at that time.

While OPEC can influence oil prices by considering supply and demand; Future oil prices are always set by OPEC. OPEC makes futures contracts with various countries or companies to sell oil. whereby a buyer acquires the right to buy oil at a futures contract price. The buyer and seller of oil have to complete the transaction on the specified date specified in the contract.

Natural disaster

Natural calamities are another major cause of oil price fluctuations. For example, when Hurricane Katrina hit the southern United States in 2005, it affected about 20 percent of the U.S. oil supply. As a result, the price of oil per barrel increased by 13 dollars. The flooding of the Mississippi River in May 2011 also affected oil price fluctuations.

Political unrest

Another major reason for oil price volatility is political instability in the Middle East. Because most of the global oil supply comes from this region. For example, oil prices rose to $128 per barrel in July 2008 due to political unrest in Afghanistan and Iraq.

Production costs and storage methods

The cost of production can also increase or decrease the price of fuel oil. Apart from this, the method of storing the oil is also a matter. Oil prices in the Middle East remain relatively low due to low extraction costs. On the other hand, because of the production cost, the price of fuel oil in Alberta, Canada is high. Also, after the cheap oil to extract runs out, the cost of producing fuel oil from the tar-turned-residues increases significantly.

US oil production also directly affects oil prices. Apart from this, excessive use of fuel oil in the industry of the developed world will lead to a reduction in production and supply, resulting in an increase in the price of fuel oil.

US daily average production in February 2020 was 12.7 million barrels. Again, if the average production is disrupted with the demand, the speed of trade decreases. In this way, day after day, the price started to increase.

Again, as the oil reserves in storage increased, the storage tanks at the main center quickly filled up. For example, by mid-April 2020, the United States had completed 60 million barrels of its 76 million barrel capacity.

Effect of interest rates

Rising interest rates raise costs for both oil producers and consumers. Sometimes these factors are related, sometimes influencing, behind the rise in fuel prices; Sometimes the price increases without any reason.

When interest rates fall, consumers and manufacturing companies are able to borrow more freely, greatly increasing the demand for oil. In general, the higher the consumption of oil, the higher the price consumers will have to buy oil.

Rising or high-interest rates help strengthen the dollar against other countries’ currencies. A stronger dollar means US companies can afford to buy more oil. Then the price may come down somewhat, and thus overall the consumer benefits.

Similarly, when the dollar is low against foreign currencies, US companies aim to buy less oil. As a result, the possibility of an increase in oil prices in the United States increases.

The article is in Bengali

Tags: Reasons price fuel oil fluctuates

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