Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
There are a few different aspects that factor into how crude oil prices affect what consumers pay at the pump. Oil is directly affected by geopolitical events, weather patterns, distribution costs, supply, demand and State and Federal taxes, to name a few. As the aforementioned forces are unpredictable and as they become more volatile, so becomes crude oil. Understanding each factor and the role it plays with respects to the rise and fall in prices, may help someone understand how to utilize the information to make better trading decisions.
First and foremost supply is affected by various socioeconomic and political factors within and around the region of origin. Also, OPEC, an organization commenced in 12 of the top oil producing companies and producing just fewer than 50% of the world’s oil supply, regulate their portion of crude oil produced. Often OPEC will be in positions to sell or barter away the oil they produce in exchange for currency or other assets that will benefit their interests. The United States itself houses around 700 million barrels in its Strategic Petroleum Reserves for use in the event of political dissensions with oil producing nations, as well as for emergencies such as natural disaster affected regions of the country.
The driving forces behind the demand for crude oil can be a number of factors. The most obvious, of course, is the rate and amount of oil each country uses. According to the CIA World Fact book, the United States tops of the market at 21%, the EU uses 15% of the world’s oil and China consumes 11%. As countries develop, particularly within their middle class infrastructure, this creates more consumers and more consumers using vehicles, driving the demand higher. On the back end of developments like this, oil refineries must adjust production to suit the growing need, which also incurs a higher cost in that production.
Fluctuations in the conflicts in the Middle East create a high level of concern over oil distribution. Political volatility in major oil producing countries can also drive prices higher and affect the price at the pump. There is also a lot of fear in the oil market generated by political access to oil rich regions in that if any large political entities, particularly opposing ones, begin to compete for access to the supply; the costs of the conflict can spike prices.
Natural disasters play their role in the cost of oil by way of access, production and distribution. When Hurricane Katrina hit the Southeastern U.S., oil refineries needed to be shut down, causing a drop in supply and the need for imported oil as well as taking from the U.S. Petroleum Reserves. When a natural disaster takes out a region’s power infrastructure supported by oil, the demand becomes extremely critical and oil regulators seize upon the opportunity for a profit. Extreme weather patterns such as the Polar Vortex that affected large portions of the United States this winter, drove the demand up as the supply decreased in the efforts to keep homes and businesses heated.
Distribution, State and Federal Taxes
According to John Hofmeister, President of Shell Oil Corporation, the price at the pump is ultimately set by the dealer. In a February 2008 interview, Hofmeister stated that although many of the factors above play a role in the price of oil, dealers sell gasoline from a wholesale position as opposed to retail. It is at the sole discretion of the dealer based on distribution cost expectations, State and Federal taxes and overhead, how much the price per gallon is either marked up or down. Dealers tend to set a price based upon what allows them to keep a reserve in the dealer account to be able to purchase the upcoming shipment.
Crude Oil Futures Trading
Any investor can see from the information above, that there is great potential in taking a position on an oil futures contract. Online Futures Trading has also risen in popularity and expanded the investment market for oil companies looking to hedge against losses and investors seeking gains on the speculation of rising and falling prices. Shortly after the decline in the housing market starting after 2006, investors abandoned mortgage backed investments and turned to oil futures as highly lucrative trading vehicles. With the oil market in a constant pattern of fluctuation, consulting a Futures Broker can help in finding the right investment based on your risk tolerance.
Visit: https://www.cannontrading.com for more information.
Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.