Domination of the Oil Market - Essay Example

? Oil market analysis May 17, Oil market analysis Introduction Oil market is a global market that is dominated by multinational organizations and is subject to regulations that govern exploration oil, processing, and trade. Analysis of the market to understand factors such as prices and environmental factors such as threats and opportunities that may operate to influence prices, directly or indirectly, is fundamental to stakeholders such as investors, intermediaries, and consumers. Further, operational dynamics in the market determines efficiency and cost and are therefore fundamental to stakeholders’ knowledge. This paper offers analysis to the market with focus on prices and market dynamics and offers expertise opinion over the market. Oil prices Trend in global oil prices has remained volatile over the past six months. Data from OPEC identifies three measures for oil prices over the period and the measures, though not equivalent over the time shows a consistent trend to support the hypothesis that prices in the oil market are relatively volatile. The OPEC reference basket reported about $ 109 a barrel on December 3, 2012 and the price slacked downwards in the following week before adopting an increasing trend with a peak in the middle of February. Trends in December, 2012, and January and February 2013, however identified kinks within the escalating momentum. With the same non-uniform scope, the oil prices reduced, with a slight distortion in the last week of March 2013, before assuming an increasing trend in the last week of April. On May 6, OPEC reference basket reported the prices at about $ 104 per barrel while the West Texas Intermediate reported the prices about $ 102 per barrel and the Brent Dated scale was less than $ 100 per barrel (Organization of the Petroleum Exporting Countries 5). Even though the three considered measures reported different prices at particular times, their consistency in trend shows existence of volatility. This variation in time series data over oil prices is instrumental to investors, traders, and even consumers. The investors can for example use the trends to forecast prices and revenues. Involved parties in the supply chain can also rely on the price trends and forecast to determine their purchase periods for price maximization. This application, in intermediaries’ purchasing patterns, may also play a role in determining the prices of crude oil from exploration companies (Organization of the Petroleum Exporting Countries 5). Oil supply Global supply of oil has been another significant factor in the oil market. A review of growth rate in the produced volume by different regions identifies volatility in supply volume with a significantly lower growth rate in the year 2013. Supply growth rate in America increased from the year 2011 to the year 2012 but the rate, while positive, reduced in the year 2013. Growth rate in Europe, in the past three years has however been negative with a reducing rate, an indication that oil productivity in the region is declining. Even though at lower rates than those reported in non OPEC European countries, countries in Pacific Asia have similarly reported negative percentage growth rates in the past three years. Other oil producing regions such as other parts of Asia, “Latin America,” “Middle East,” “Africa,” and FSU have however registered minimal changes in produced volumes with more negative percentages and the trend in the non-OPEC countries indicating a general reduction in oil supply in the past two years (Organization of the Petroleum Exporting Countries 34). A slight increment in supply volume has however been forecasted among non-OPEC oil producing regions. Oil supply from OECD countries has however been increasing while supply volumes from developing counties has registered a reducing trend between the years 2010 and 2012 by assumed an increasing trend in the year 2013. Supply volumes from former Russian States and other non-OPEC regions have also reported increasing trends in volume of oil supply. Data from OPEC countries over the past 24 months also identifies volatility because of differences in monthly supply volumes over the period. Reported at an average of about 29 million barrels per day in May 2011, the blocks supply volume increased with kinks up to a pick in April 2012, before assuming a decreasing trend until January 2013. The block’s supply volume was however constant in early 2013 before a slight increment in April. The global supply trend has almost been similar to the trend in OPEC countries (Organization of the Petroleum Exporting Countries 36- 44). Demand Demand is another significant factor to the oil market. The global demand has a predictable trend that can be used to forecast future levels of demand. The global demand exhibited a reducing trend from the year 2011 into the first two quarters of the year 2012 after which the trend increased but fell again in the first quarter of the year 2013. A similar trend is observable in demand for oil among OECD countries that also accounts for the largest block consumption of the global oil. Demand by members of the block was for example 46.5 million barrels per day in the year 2011 but this fell to 46.3 million barrels per day in the first quarter of the year 2012 before falling further to 45.56 million barrels per day in the second quarter. The trend then changed from the third quarter. Demand in other regions have however been increasing in the same period, contrary to the global trend. OECD countries, based on OPEC records, are therefore the most significant consumers of global oil and its trend predicts trends in the global demand. Further, America is the largest global consumer of oil and accounts for about 27 percent of the total demand. Its demand trend is also consistent with the global demand trend. Growth in demand for oil also vary by regions and time and quarterly data from the year 2010 to the first quarter of the year 2013 identifies a generally growing demand for oil among OECD country but the demand has been decreasing in non OECD countries since the year 2011 (Organization of the Petroleum Exporting Countries 26-28). Determinants of oil price Price mechanism is also significant to understanding the oil market through factors that determine the prices and the factors’ interaction to dictate the prices over time. Region of utility is one of the factors to oil prices and the level of industrialization determines price volatility by regions with demand shock as the key moderator. Oil prices in developing countries responds quickly and faster to demand shock as compared to prices in developed countries and this knowledge can be instrumental to oil distributers. Demand for oil in developing countries also play a significant role in determining global oil prices than demand in developed countries dictates (Aastveit, Bjornland and Thorsrud 12- 15). Economic stability at different economic levels, global or national, also plays a significant role in determining oil prices. While the global economy has a universal effect on oil prices, effects of national economies depend on the economy’s significance to the global market for oil. Economy of the United States, a major global economic power, has for example reported significant impacts on global oil prices as was observed in the year 2009 when recession in the United States reduced the nation’s demand for oil and the result was reduced global prices (Jackson 1). Depletion of resources also dictates their prices and this projects an increasing trend in oil prices when all other factors are held constant. Other factors such as incomes and demand for gasoline also dictate price of oil. The major determinants of price in the oil market are, however, supply and demand forces (Fattouh 3- 13). Data from OPEC establishes a relationship among global oil demand, supply, and price. The demand for oil reduced in 2012 then increased before falling in the first quarter of 2013 and price followed a similar trend that increased in the last two quarters of 2012 before falling in the first quarter of the year 2013. Global oil supply however registered a reducing trend towards the end of the year 2012 and stabilized before increasing in the first quarter of 2013 and the relationships are consistent with the general elasticity model for price, demand, and supply and this means that demand and supply forces primarily drive the market (Organization of the Petroleum Exporting Countries). Regulatory measures by OPEC such as limitations on production rates as were realized in 1980s also regulates supply with the aim of controlling prices (Westelius 11). Personal opinion The oil market is a competitive market that is majorly regulated by demand and supply forces. Data also indicates massive utility in OECD countries, especially in America, and significance of developing countries in determining global prices. Consistency in the market’s data trend means that it can be used to guide investment decision and a potential market is identifiable in America that has high demand for oil. Analysis of the market in developing countries is also necessary for predicting prices towards investment decisions. Further, analytical approach is necessary to forecasting drivers of the oil market for suitable profit maximization strategies such as increasing inventories just before price hikes and maintaining minimum inventory levels before prices fall. Works cited Aastveit, Knut, Bjornland, Hilde, and Thorsrud, Leif. “What drives oil prices? Emerging versus developed economies.” Norges Bank: Working Papers 11. (2012): 1-38. Print. Fattouh, Bassam. “The drivers of oil prices: The usefulness and limitations of non-structural model, the demand-supply framework and informal approaches.” University of London 71. (2007): 1-43. Jackson, James. “U.S. trade deficit and the impact of changing oil prices.” Congressional Research Service. February 21, 2013. Web. May 17, 2013. < http://www.fas.org/sgp/crs/misc/RS22204.pdf >. Organization of the Petroleum Exporting Countries. “Monthly oil market report.” Organization of the Petroleum Exporting Countries 10. (2013): 1-77. Print. Westelius, Niklas. External linkages and policy constraints in Saudi Arabia. Washington, DC: International Monetary Fund, 2013. Print. Read More