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The supply and demand behind United States Oil prices - Research Paper Example

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The supply and demand behind United States Oil prices Name of the student University Introduction The macroeconomic conditions existing globally play an influential role in setting the international demand for liquid fuel. In this era of globalization the International Energy Agency has put forth that high prices of oil in general create considerably adverse effect on the economic growth of the global economy…
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The supply and demand behind United States Oil prices
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Download file to see previous pages Production: The Organization of Petroleum Exporting Countries (OPEC) syndicate accounts for 40 percent of the entire production of oil at the global level. The export of oil by the OECD countries represents approximately 60 percent of the total amount of oil traded in the international markets. The size of supply of crude oil by the OPEC countries is considerably large. This makes its activities and statements influence the oil prices prevailing in the world. Deliberate reduction in production by the OPEC countries leads to fall in prices of oil internationally.  Supply: 60 percent of the world’s oil supply comes from the non-OPEC countries. Although the group of non- OPEC countries is greater in size than the OPEC group, they are the price takers in the international market. This is because they do not enjoy any spare capacity. This implies that these suppliers merely act according to the market prices rather than making attempts to manipulating them. That is, they respond to market prices rather than attempting to manipulate them. The non OPEC countries produce nearly at the full capacity and lapse in production leads to rise in total oil supply. It gives the OPEC the facility to further maneuver world supplies.   Global oil inventories: Inventories of oil maintained globally balance the demand and supply of oil in the world. In case of greater production of oil than the level of demand, excess supplies are stored as inventories. Again these inventories can be used in a reverse situation. When consumption becomes greater than demand, inventories are utilized to meet this incremental demand. The relationship existing between the oil prices and inventories of oil allows the market to correct the effect of any disruptive activity. If the inventory is building up, it implies that there is excess supply. In this situation, oil prices drop ultimately leading to a fall in production. Thus it brings a balance between demand and supply. On the contrary, if the level of inventory is negative, there is a shortage of supply compared to the demand level. The oil prices would rise and production of oil would also increase.  Financial markets: Trading in oil does not only involve the physical market. Oil brokers also make trade contracts that relate to future dealings in oil. Future delivery of oil is termed as “futures”. There are customers, such as airlines, that purchase futures in order to hedge against the possibility of oil price rise in future. This might bring unfavorable effects on the ability of the company to operate efficiently and profitably. Often oil producers make future contracts so that it might deliberately lock the price for a particular time period.  Demand: The Organization of Economic Cooperation and Development (OECD) mostly consist of the United States and the greater part of Europe and some other advanced countries. This organization takes the responsibility of the world’s 53 percent of the total oil demand (Fessler, 2011). The member nations consume oil in much higher quantity than the non-OECD countries. However, they exhibit a lesser rate of growth. The demand from the OECD countries has gone down while that by the non OECD countries has gone up in the period of 10 years between 2000 and 2010 (Fessler, 2011).   Non-OECD demand: China, Saudi Arabia and India together had the ...Download file to see next pagesRead More
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