Why oil prices fluctuate and result in volatility in the stock markets
Crude oil is one of the most basic global commodities. Fluctuation in the crude oil prices has both direct and indirect impact on the global economy. Therefore, the prices of crude oil are tracked very closely by investors the world over. Crude oil prices have gone up to record levels of USD 100 per bbl after reaching a high of USD 145 per bbl (rise of around 70 percent from previous year's levels).
The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly).
There are many factors that influence the global crude oil prices including technology to increase production, storage of crude oil by richer nations (one major indicator that is tracked closely is the US crude oil inventory data), changes in tax policy, political issues etc. In the recent past, we have seen many factors influencing the prices of global crude oil.
These are some of the important factors that influence crude oil prices globally:
Production
A large part of the world's crude oil share is produced by OPEC (Organization of Petroleum Exporting Countries) nations. Any decisions made by OPEC countries to raise the prices or reduce production, immediately impacts the prices of crude oil in the global commodity markets.
Natural causes
In the recent past, we have seen many events driving volatility in the crude oil prices. Events like a hurricane hitting the oil producing areas in the US have driven the crude oil prices in global markets.
Inventory
Oil producers and consumers build a storage capacity to store crude oil for immediate future needs. They also build some inventories to speculate on the price expectations and sale/arbitrage opportunities in case of any unexpected changes in supply and demand equations. Any change in these inventory levels triggers volatility in crude oil's prices which in turn creates ripples in the stock markets.
Demand
The demand of crude oil is rising sharply due to high growth and demand from the emerging economies. On the supply side, the major sources of supplies are still the same as they were in the last decade. This is another factor that is influencing the prices of crude oil upwards.
Crude oil inventories have demonstrated a highly cyclical pattern in the recent past. Usually, crude oil inventories increase in the summer months and decrease in the winter months. This is because cold temperatures in the winter increase the use of energy for heating in many cold countries. The demand for fuel goes above supply and results in a need to tap inventories.
Likewise, during warm summer months, supply generally exceeds demand and petroleum inventories build up. Hence, the crude oil prices drop. Crude inventory levels provide a good signal of the price direction.
India imports more than 80 percent of crude requirements from oil producing countries and therefore fluctuations in oil prices are being tracked more closely in the domestic markets. Prices of essential commodities like crude are also one of the prime drivers of inflation in the global economy. As we get more globalize, domestic firms and investors need to understand the world economy and financial markets well, in order to respond to the new realities of India as an open economy better.
Crude oil is one of the most basic global commodities. Fluctuation in the crude oil prices has both direct and indirect impact on the global economy. Therefore, the prices of crude oil are tracked very closely by investors the world over. Crude oil prices have gone up to record levels of USD 100 per bbl after reaching a high of USD 145 per bbl (rise of around 70 percent from previous year's levels).
The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly).
There are many factors that influence the global crude oil prices including technology to increase production, storage of crude oil by richer nations (one major indicator that is tracked closely is the US crude oil inventory data), changes in tax policy, political issues etc. In the recent past, we have seen many factors influencing the prices of global crude oil.
These are some of the important factors that influence crude oil prices globally:
Production
A large part of the world's crude oil share is produced by OPEC (Organization of Petroleum Exporting Countries) nations. Any decisions made by OPEC countries to raise the prices or reduce production, immediately impacts the prices of crude oil in the global commodity markets.
Natural causes
In the recent past, we have seen many events driving volatility in the crude oil prices. Events like a hurricane hitting the oil producing areas in the US have driven the crude oil prices in global markets.
Inventory
Oil producers and consumers build a storage capacity to store crude oil for immediate future needs. They also build some inventories to speculate on the price expectations and sale/arbitrage opportunities in case of any unexpected changes in supply and demand equations. Any change in these inventory levels triggers volatility in crude oil's prices which in turn creates ripples in the stock markets.
Demand
The demand of crude oil is rising sharply due to high growth and demand from the emerging economies. On the supply side, the major sources of supplies are still the same as they were in the last decade. This is another factor that is influencing the prices of crude oil upwards.
Crude oil inventories have demonstrated a highly cyclical pattern in the recent past. Usually, crude oil inventories increase in the summer months and decrease in the winter months. This is because cold temperatures in the winter increase the use of energy for heating in many cold countries. The demand for fuel goes above supply and results in a need to tap inventories.
Likewise, during warm summer months, supply generally exceeds demand and petroleum inventories build up. Hence, the crude oil prices drop. Crude inventory levels provide a good signal of the price direction.
India imports more than 80 percent of crude requirements from oil producing countries and therefore fluctuations in oil prices are being tracked more closely in the domestic markets. Prices of essential commodities like crude are also one of the prime drivers of inflation in the global economy. As we get more globalize, domestic firms and investors need to understand the world economy and financial markets well, in order to respond to the new realities of India as an open economy better.
