Article Analysis - Research Paper Example

Consequent to the reduce demand, February-delivery of heating oil fell by 1.2 percent on the New York Mercantile Exchange. This paper explores how consumption patterns over a period affect the price of heating oil – when supply remains the same; demand remains the same. The paper also reviews how price elasticity of the demand for a given commodity plays a crucial role in deciding about its demand patterns. While Supply Remains Fairly Same, Price of the Commodity May Still Fall Heating oil is a freely traded commodity and its supply and demand patterns largely decide about its prices.

Heating oil is a hugely consumed commodity in the U.S and globally. Apart its industrial consumption, heating oil is largely consumed by the Northeast region of the U.S. to provide warmth in the homes during winter months. It is obvious that its demand usually surges during winter months; however, this winter, as reported in the article, heating oil experienced a subdued demand; perhaps, due to milder winter or due to economic recession that is going in the US for quite some time or mix of it.

Market always draws inference about the likely consumption from the past data and accordingly readies itself for the supply; however, when for some reason demand does not match intended supply, the price starts plummeting to find a new equilibrium. Heating oil is a sensitive item and its prices keep on fluctuating regularly following change in supply and demand dynamics. When demand and supply positions are in equilibrium prices remain fairly stationary but that is not found in case of heating oil as consumption patterns keep on changing due to various reasons regularly.

The following schematic represents how new equilibrium from E1 to E2 is quickly achieved in reference to the reduced demand. D1 Price D2 Supply E1 E2 Quantity While Demand Remaining Fairly Unchanged, Price of the Commodity May Still Rise The article speaks about the reduction in the prices of heating oil due to reduced demand; however, reverse is also true that when supply of the heating oil plummets while its demand remains more or less unchanged, its price may still rise. Though heating oil is a refinery product but its pricing is largely linked with the price of crude oil and its supply, which is controlled by OPEC countries.

OPEC being an international cartel of the major crude oil producing countries controls its supply so as to prevent prices to go down beyond certain levels. This is done largely by controlling supply of the crude through reduced production among its member countries. The law of demand and supply in price determination takes its course even then. The reduced supply arrests the fall of price to find a new equilibrium that can restore the minimum desired price by this cartel. Thus, OPEC members have been maneuvering the supply of the crude oil by administering the production quota for its member countries to maintain its prices above certain levels that in turn does not allow the prices of all downstream products to fall below specific levels.

However, in a dynamic world things keep on changing rapidly. Any new large oil finds anywhere in the world outside OPEC may alter supply dynamics of crude oil and change the price behavior of all downstream products including heating oil. The Price-elasticity of Demand of Heating Oil is Low The price elasticity is a measure of the change in demand