Fluctuation of Oil Prices Based on Supply and Demand and Market Sentiment

The prices of oil usually gets determined by the changes in demand and supply. The long term price movement will also change the demand. The rices of oil fell down in the years 2008 and 2009 due to the recession. The rices however recovered when the global economy recovered. In 2011, the economy also faced an oil shock in the year 2011. At that time the price fell back to $80 per barrel. The price of oil however remains same in both 2011 and 2012. The prices of oil were the highest in the year 2012. The average price of oil was $109.45 per barrel. Low interest rate also makes the price of oil high. However, the price of oil came down in the year 2014.

In the year 2016 the price went down the lowest of 40.68 US dollars per barrel. In the year 2016, the price of oil went down to more than seventy percent which was lower than the year 2014. One of the reason of such low price in the year 2016 was due to change in supply and demand. The demand for oil was much lower than the supply in the year 2016. The United States have also produced more than double from the last few years. Therefore it means the need for import decreases. Increase in the production of energy efficient vehicles also means less demand for crude oil (Kayalar,  Küçüközmen and Selcuk-Kestel 2017)..

The prices of oil increased in 2017 to 52.51 US dollar and 70.28 US dollar. After the rise in price of oil, the members of Organization of the Petroleum Exporting Countries agreed to reduce the output foil by 1.2m barrels from January 2017. The biggest cut oil output was made by Saudi Arabia. From the year 2018, it has been predicted that the oil consumption will be more than the production and then the shock will b falling at an accelerating rate.

The oil prices in the year 2008 mostly went down due to presence of Great Recession. The consumption of oil went down sixteen percent. Some of the reasons behind oil shock n the year 2008 are the stagnant supply. The supply of oil remained stable for quite a long period of time due to hurricanes in Mexico and turmoils taking places at the different parts of the world. Also the decline of oil production from Saudi Arabia is one of the reason behind the stagnant supply.

Factors Affecting Elasticity of Demand and Supply of Oil

The second reason behind the falling prices is although the supply of oil may become stagnant the demand however grew strongly. Especially in case of China the consumption of oil particularly increases (Teixeira, Madaleno and Vieira 2017).  The consumption of oil increases twice in the year 2008. The Energy Information Administration went down to 9.6 percent lower. As a result of past oil shocks the price of oil in the year 2008 fell down. The prices of gasoline is one the factor behind fall in sales of the automobiles.

The oil industry is full of economic booms and busts. Some of the reasons behind the fall in prices of oil in h year 2014 and 2015are oversupply of crude oil. After the result of economic recession the price of oil fell down in the year 2008. However, after the economic recovery the price it hovered between $100 and $125 in the year 2014 and after that the price fell down steeply. The consumption of oil which increased heavily in the first decade went down drastically after the year 2010. As China has the largest population, so the lower demand had significant effect.

This is one of the major reason for the fall in prices in oil. Along with increase in the supply of oil, the demand for the oil started decreasing. Along with that the economies of many developing countries along with Europe were also weakening. There has also been increase in the energy efficient vehicles which will lead to decrease on demand of oil (Teixeira, Madaleno and Vieira 2017). The devaluation of the currency of China also affected hugely on the price of oil. As China was one of the largest importer, decrease in demand of oil from China hugely affected the price of oil in 204 and 2015.

The collapse in the price of oil between 2014 to 2016 was mainly driven by the supply glut and failed increase the price. Between the years 2014 and 2016 the global economy have faced on of the largest decline in the prices of oil in the recent history. The price drop which was nearly seventy percent was considered as one of the biggest declines since the World War II. Rise in the U.S production of oil played very important role in the plunging price of oil in the early 2016. Booming in the reduction of oil supply in the United States is also considered as one of the major factors for the plunging prices of oil. The surge in the price of oil in the year 2011

The prices of oil mainly gets affected by mainly two factors that are supply and demand and the market sentiment. The market forces mainly affects the price of oil. The production of oil also increased in the year 2004 by 4.2%   one of the reasons behind the rise in price of oil in the 2005 is the rise of supply above the level of 2004. One of the reason behind the rise in price of oil is that as the developing nations like China and India have been growing rapidly, therefore their economies are also becoming hugely urbanized which has led to increase in the demand of oil. The supply of oil also have decreased because of the turmoil taking place in Nigeria, Iraq and Iran.

The increased speculation in the commodity markets have also act as a major role for the changing price of oil.  Both microeconomic and macroeconomic factors affects the price of oil. The price of oil was all time high of $14368 per barrel. In the year 2011, the prices of the crude oil went up to $113.93 per barrel in April.  The prices was increasing steadily after that. The high price of the oil leas to high prices of gas. High prices of oil are usually caused by high demand, low supply, quotas of OPEC or when there is a drop in the value of dollar. Consumption of crude oil represents about five per cent of gross domestic product.

Some of the factors which affects the price of oil in the year 2018. The natural disaster can also make huge waves in the oil market. Also the crude oil production in Libya and Nigeria have also fell down in the recent decades due to the recent ears. Ears in Iran and Iraq have also resulted in reduction of supply of oil in the market resulting in rising in prices of oil. The decision of the President of the United States of exiting the nuclear deal with Iran also lead to an increase in the price of oil. The exports of oil from the Middle Eastern Countries have also fell down.

However, the curbs provided by the oil cartel Prac and its partners have also brought supply and demand back to equilibrium. The political and economic crisis have also affected the price of oil in the recent year (Apergis,  Ewing and Payne 2016). As the output of oil have decreased so much that Venezuela have also stopped production. Iran and Venezuela have also resulted in the rise in price of oil. Healthy economic activity have also be an important factor behind the rise in the price of oil.

Elasticity refers to the degree of responsiveness in the supply and demand with relation to the change in price. The factors that will be affecting the price of oil in the next two to three years are introduction of electric vehicles and energy efficient vehicles in the market. With the change in taste and preference of the consumers the demand of crude will also change. With the change in the decomposition of the population in the world the demand of oil will change. With the changes in expectation of the future price of the oil the demand for crude oil will also change. Lower oil prices will also lead to high demand of oil in the future.

The income effect will also affect the high demand of oil (Kayalar,  Küçüközmen and Selcuk-Kestel 2017). The effect of changes in the price of oil will be different for both exporting and exporting countries. The global oil prices have affected the business hugely. The driving oil prices have also affected t5he North Sea industry. When the oil prices become lower it will be benefitting the business. Falling in the price of oil is also a result of improved economic outlook. Low gas prices means low cost of operations. Therefore low fuel prices will help the business owners manage and reduce expense lines. In economic the elasticity of demand states how sensitive the demand for good will change the price and the income of the consumer. Gasoline is a highly inelastic demand which means that changes in price will have only a little influence on the demand. Price elasticity also measures the responsiveness of the demand to the changes in demand. The last ten years have also brought a structural change to the world oil market.

Price elasticity of supply measures the relationship between changes in quantity supplied following a change in price. Supply will be more elastic the longer duration of the time period. Some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions which then also affects production rate. The demand for oil will be growing which is $46 per barrel over the few weeks remaining less than half from the year 201 to 2014.  

The price elasticity of demand is a kind of measure which is used in economics in order to show responsiveness of the quantity demanded of the good. On the other hand price elasticity of supply is a measure used in economics in order to show responsiveness of the quantity supplied of a good or service to change in its price. The factors that affects the elasticity of demand are the presence of number of close substitutes, cost of switching between products along with peak and off peak demand.

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