Crude Oil: The Lifeblood of Global Economies and the Forces Shaping Its Price

Crude Oil: The Lifeblood of Global Economies and the Forces Shaping Its Price

What is the Rule of 72?
What is the Rule of 72?
The underlying conflicts surrounding crude oil prices
Crude oil is often called “the mother of all commodities” and for good reason. It fuels economic growth, powers industries, and remains essential to everyday life despite global efforts to transition toward renewable energy. From transportation and manufacturing to financial markets and geopolitics, oil’s influence is unparalleled.
1. Why Is Crude Oil Analysis Important?
Crude oil prices are deeply tied to the health of the global economy. While oil supports development by providing energy, price volatility can disrupt stability, shape inflation, and alter monetary policy decisions.
• Inflation Link: Energy made up about 7% of the U.S. Consumer Price Index (CPI) in 2023. Although the weight is modest, oil’s volatility makes it a major driver of short-term inflation trends. A sudden surge in gasoline prices, for example, often leads to higher consumer spending data and inflation readings.
• Policy Impact: Unexpected price spikes may push central banks to tighten monetary policy. Conversely, falling oil prices can relieve inflationary pressures.
In short, crude oil acts as both an economic catalyst and a risk factor, making its analysis critical for policymakers, investors, and businesses alike.
2. What Drives Crude Oil Prices?
Oil is unique in that it is simultaneously a commodity, a geopolitical lever, and a financial asset. These three dimensions create a complex framework for understanding price dynamics.
(a) Commodity Attributes: Supply and Demand
Who Produces Oil?
Oil is a non-renewable fossil fuel refined into gasoline, diesel, jet fuel, and more. Supply is concentrated among a few powerful producers, giving them outsized influence over pricing.
• OPEC’s Role: Founded in 1960, the Organization of the Petroleum Exporting Countries (OPEC) coordinates output among its members, which collectively control 40% of global production and 60% of exports. By adjusting production quotas, OPEC can effectively set a floor under prices.
As of 2023, the organization has 13 member countries, accounting for approximately 40% of global oil production and 60% of the global oil market.

 • Saudi Arabia’s Influence: As OPEC’s largest producer (34% of output in 2021), Saudi Arabia frequently leads decisions on production cuts and market strategy.

change in saudi arabia crude oil production can affect oil prices
• Non-OPEC Producers: The United States, Russia, Canada, and China are major players outside OPEC. The U.S. shale boom significantly disrupted OPEC’s dominance, leading to the creation of OPEC+ in 2016, a broader alliance that includes Russia and other producers.
The US has the world's largest shale oil reserves, increasing production efficiency and reducing reliance on foreign oil imports.
The introduction of shale oil disrupted the previously OPEC-dominated pricing and suppressed international oil prices for an extended period, leading to the establishment of OPEC+ through an agreement between OPEC and ten other oil-producing nations.
What is the difference between OPEC and OPEC+?
OPEC+ was established in 2016 and expanded beyond OPEC's membership, including countries such as Russia, Azerbaijan, and Kazakhstan.
In summary, both OPEC and OPEC+ aim to maintain stability in the international oil market. However, with the inclusion of these countries, OPEC+ has a higher oil supply and proven reserves, OPEC+ has become the driving force behind many of the developments in the global oil markets over recent years.
OPEC and OPEC+ memberstotal oil production from OPEC members and OPEC+
Who Consumes Oil?
• The United States is both the world’s largest producer and consumer, driven by its car-dependent economy.
• China and other emerging economies have seen surging demand due to industrialization and infrastructure growth.
Together, the U.S. and China account for over half of global oil consumption, making their GDP growth trends highly correlated with oil demand.
the largest oil consumer countries and the largest oil production countries
Inventories as a Signal
• The International Energy Agency (IEA), formed in 1974, coordinates emergency reserves among OECD countries to stabilize supply disruptions.
• In the U.S., weekly reports from the Energy Information Administration (EIA) and the American Petroleum Institute (API) provide critical short-term supply-demand insights.
• Rising inventories generally pressure prices lower, while falling inventories signal tighter supply and higher prices.
(b) Geopolitics: The Risk Premium
Few commodities are as politically charged as crude oil. Wars, sanctions, or diplomatic standoffs in producing regions can send prices soaring overnight.
• Historical Oil Shocks: The 1973 oil embargo triggered a global crisis, highlighting oil’s vulnerability to geopolitical disruption.
• Modern Examples: Tensions in the Middle East, sanctions on Russia, or disruptions in key shipping routes like the Strait of Hormuz frequently add a “risk premium” to oil prices.
When supply chains stabilize or conflicts ease, this premium often unwinds, leading to price declines.
(c) Financial Attributes: Oil as an Investment
Oil isn’t just fuel—it’s a financially traded asset. Futures contracts, options, and ETFs allow investors worldwide to speculate on its price.
Key Benchmarks
• WTI (West Texas Intermediate): Traded primarily in the U.S., WTI is known for its liquidity and transparency.
• Brent Crude: The global benchmark, favored for seaborne delivery and widely used in Europe, Asia, and Africa.
Correlations with Other Financial Assets
• Commodities: Oil prices often move in tandem with other commodities, reflecting broader demand cycles.
• U.S. Dollar: Oil is priced in dollars, creating a historical inverse relationship. A weaker dollar often supports higher oil prices, though this correlation has weakened in recent years.
• Equities: Overall, oil’s link to the stock market is weak. However, energy and transportation sectors show strong
How does the supply and demand relationship affect oil prices?
Crude oil, like most commodities, is affected by supply and demand. When there is more supply than demand at a given level, the market price decreases. Conversely, when there is limited supply and high demand, crude oil prices can surge.
Until now, the global oil market has been a seller's market. As a well-known cartel, OPEC+ member countries have a strong incentive to keep oil prices as high as possible. Despite having the world's highest oil reserves, OPEC+ often controls global crude oil supplies through production cuts or supply restrictions for their interests.
Note: A cartel, also known as a monopolistic interest group, is an independent enterprise or organization that controls supply or manipulates prices.
OPEC+'s statements can temporarily affect oil prices by changing expectations. For example, in the latter half of 2022, oil prices dropped from $120 within three months to around $90 due to concerns about a global economic downturn. OPEC+ declared production cuts in October 2022 to elevate oil prices, and soon after, benchmark Brent crude oil prices surged past $93 per barrel.
Similarly, crude oil inventories can provide insight into the supply-demand relationship in the market. When petroleum inventories increase, it can be seen as a signal that the market supply is sufficient or demand has decreased, putting pressure on oil prices to fall. Conversely, a decrease in inventory may indicate increased demand, and prices may rise sharply.
For example, US commercial crude oil inventories have had a significant negative correlation with West Texas Intermediate (WTI) crude oil prices.
the significant negative correlation between US commercial crude oil inventories and WTI crude oil prices
(b) Geopolitics: The Risk Premium
Few commodities are as politically charged as crude oil. Wars, sanctions, or diplomatic standoffs in producing regions can send prices soaring overnight.
• Historical Oil Shocks: The 1973 oil embargo triggered a global crisis, highlighting oil’s vulnerability to geopolitical disruption.
• Modern Examples: Tensions in the Middle East, sanctions on Russia, or disruptions in key shipping routes like the Strait of Hormuz frequently add a “risk premium” to oil prices.
When supply chains stabilize or conflicts ease, this premium often unwinds, leading to price declines.
Two large-scale global oil crises occurred due to oil embargoes leading to supply disruptions. During these periods, world oil market prices skyrocketed, significantly impacting countries that rely on oil and causing their economies to slow down noticeably.
crude oil prices react to a variety of geopolitical and economic events
(c) Financial Attributes: Oil as an Investment
Oil isn’t just fuel—it’s a financially traded asset. Futures contracts, options, and ETFs allow investors worldwide to speculate on its price.
Key Benchmarks
• WTI (West Texas Intermediate): Traded primarily in the U.S., WTI is known for its liquidity and transparency.
• Brent Crude: The global benchmark, favored for seaborne delivery and widely used in Europe, Asia, and Africa.
Correlations with Other Financial Assets
• Commodities: Oil prices often move in tandem with other commodities, reflecting broader demand cycles.
crude oil plays a major role in commodity investment
U.S. Dollar: Oil is priced in dollars, creating a historical inverse relationship. A weaker dollar often supports higher oil prices, though this correlation has weakened in recent years.
Equities: Overall, oil’s link to the stock market is weak. However, energy and transportation sectors show stronger sensitivity to price swings.
• Treasury Bonds: Rising oil prices can stoke inflation, pushing yields higher and bond prices lower.
• Inflation Expectations: Oil is a key input in market expectations of future inflation, making it a critical variable for Federal Reserve policy decisions.
crude oil correlation with other assets
Indicators Investors Can Pay Attention to
Crude oil's characteristic of having "inelastic demand and elastic supply" makes it challenging to forecast its price. However, investors can observe crude oil prices by combining related indicators such as: commodity, political, financial, and weather conditions. Here are some relatively important indicators for reference:
crude oil _Indicators Investors Can Pay Attention to
3. Extreme Weather and Natural Events
Beyond markets and politics, oil is also exposed to environmental risks.
• Hurricanes: Damage to offshore rigs, refineries, or pipelines in the Gulf of Mexico often triggers price spikes.
• Heat Waves & Droughts: Strains on power grids and hydropower can disrupt refining and transportation.
• Winter Storms: Harsh winters boost demand for heating fuels, driving seasonal price surges.
Monitoring weather patterns can give investors early warning of potential supply disruptions.
4. Extreme Weather Impacts the Oil Industry
Crude oil is also affected by unexpected events such as extreme weather and natural disasters. Here are three examples:
• Hurricanes and storms can cause severe damage to offshore drilling platforms, refineries, and pipelines, leading to price increases.
• Heat waves and droughts can also affect the oil industry. For instance, prolonged hot weather may reduce hydropower generation, leading to power outages. This could impact the refining and transportation of oil, resulting in a decrease in supply and an increase in prices.
• Winter storms can impact the oil industry in various ways. As temperatures drop, there is an increase in demand for heating oil and natural gas, leading to increased demand.
Investors can prepare in advance for potential disruptions caused by extreme weather by monitoring weather patterns.
Summary
crude oil prices, commodity attributes, demand,supply,inventory;OPEC,IEA,OECD
Conclusion
Crude oil sits at the intersection of energy, economics, and geopolitics. It is more than just a commodity—it’s a barometer of global stability and a driver of inflation, monetary policy, and financial markets.
For investors, policymakers, and businesses, keeping an eye on crude oil means more than watching pump prices—it means understanding the broader forces shaping the global economy. 



Disclaimer:

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Tradient makes no representation or warranty as to its adequacy, completeness, accuracy or timeline for any particular purpose of the above content.

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