Crude oil is the world's most widely traded and most commonly used commodity. Oil prices are primarily determined by the relationship between supply and demand. Demand will drive price increases (if the supply remains stable), and supply will drive price falls (if the demand remains static). Keeping that in mind, let's delve into the key factors affecting supply and demand.
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In September 1960, the Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, by five countries, namely the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to be the Founder Members of the Organization. Now, the Organization has 13 Member Countries.
The OPEC aims to influence oil prices by adjusting supply volumes. In order to increase the price of oil, its members can reduce their production quotas to limit supply. If they wish to reduce the price of oil, they could increase production quotas to increase supply. In the event that demand stays steady, oil prices will move in the intended direction.
Due to the fact that oil production quotas for OPEC member states and certain non-voting observers are set during OPEC meetings, these meetings are highly important to traders. They can have a significant impact on the global oil supply as well as its price. This is because OPEC members control roughly 60% of proven crude oil reserves, and the group accounts for approximately 44% of the world's oil consumption.
In recent years, OPEC+, a loosely affiliated organization, has been made up of 13 OPEC members and 10 major non-OPEC oil exporters aiming to regulate the supply of oil to set the price on the world market. The purpose of OPEC+ was partly to counteract other nations' ability to produce oil, which might limit OPEC's ability to dominate the price. Three major factors explain why OPEC+ retains its influence:
1. There are no alternative sources comparable to its dominant position.
2. Developing alternatives to crude oil in the energy sector is not economically feasible.
3. It has a lower cost competitive advantage than non-OPEC production with a higher cost.
Non-OPEC oil producers are nations that produce crude oil outside of OPEC and shale oil producers. A number of the world's top oil producers are non-OPEC nations. It includes the United States, the leading oil producer globally, Canada, and China.
Since most non-OPEC countries are large consumers, they have limited capacity to export. Despite producing large amounts of oil, many countries are net oil importers, which means they exert very little influence on the oil prices from a supply perspective. In recent years, non-OPEC oil producers, particularly in the United States, have seen their production and market share increase due to shale oil and gas discovery. It is true that shale oil technology is a game-changer. Still, it requires substantial upfront investments, which serve as a deterrent to shale oil producers in the short term.
Historically, strong economic growth and industrial production have contributed to increased demand for oil, as evidenced by the increased demands from fast-growing developing nations. Market participants examine the world's oil demand, particularly that of the US and China. The strength or weakness of major economies directly impacts the perception of energy consumption. Several economic indicators are released weekly, and investors pay close attention to them to evaluate the demand for energy sources.
The US Energy Information Agency provides estimates each month. The summer driving season is when gasoline demand is higher, while the winter driving season is when it is low. A forecast of gasoline demand in the summer is based on AAA travel forecasts, while a weather forecast is used in the winter.
Here are some weekly reports that help investors to examine the demand versus supply:
Report on Crude Oil & Distillates Inventory by Energy Information Agency.
The Department of Energy releases weekly reports that list the amount of crude oil and distillates in storage facilities. Increases in inventory are seen as an indicator of increased supply, whereas decreases are seen as an indicator of increased demand. A second key metric presented is "refinery utilization". Crude is in higher demand when utilization is high and vice versa.
Baker Hughes Drilling Report of active rigs. Each week, this oilfield service company compiles a list of the total number of rigs drilling for oil and gas. Increasing rig counts indicate that more potential supply will be available in the future. Reduced rig counts could mean less supply down the road.