Why & How Oil Prices Fluctuate

Lorimer Wilson June 3, 2016 1 Comment 2,350 Views

…To understand why and how oil prices fluctuate…[take a look at] today’s infographic from Jones Oil …[which illustrates] the many different issues – supply and demand, weather, technology, geopolitics, as well as other factors – that make oil prices fluctuate.

An infographic/article (original) by Jeff Desjardins (VisualCapitalist.com) which has been slightly edited ([ ]) and abridged (…) to provide a faster and easier read.

Ultimately, oil prices fluctuate because of changes to supply and demand, but the challenge for investors is that there are multiple factors at play that can affect those fundamentals. Many of them are interconnected.

These include weather events, supply interruptions (such as worker strikes or spills), broader demand trends such as the emergence of renewable energy, OPEC decisions, or other events that can have an immediate effect on supplies.

There are also meta factors, such as the “fear” that a future event may happen that could in turn affect supply and demand. This is where geopolitical risks get priced in, such as potential escalation of conflict in the Middle East or future election results of oil exporting nations.

Information and forecasts can also play a role. Imagine being an oil producer in early 2014, hearing some of the bullish reports above. Would you, or would you not invest in a project that had a breakeven of $60/bbl oil? Even a significant oil price fluctuation of +/- 30% would still have you come out on top.

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