Historical oil prices
Everything started with the Yom Kippur War. In response to the support provided to Israel by western countries, many oil producing countries of the Middle East begin to decrease their production causing a quick and dramatic price explosion.
It was only at the end of 1974 that the embargo finished and the oil again became accessible. But this embargo left its mark on the global economy that knew an unprecedented crisis at this time.
A short time later, the war between Iran and Iraq interfered with oil prices. Iraq stopped all the oil exports, the oil price then increased considerably as the global demand could not be totally satisfied.
The link between these two oil crises contributed to the development of oil production at other geographic sites aiming to reduce the dependence of the West on Eastern production. Also, there was the beginning of a global awareness of the need to save energy.
As a result, the high demand that the world had shown up to this point started to decrease. Anticipating a strong drop and in order to keep sale prices high, the OPEC countries decided to decrease their production. Only Saudi Arabia duplicated its production in 1986, in answer to the quota problems that had not been respected by other oil producing countries.
However, in 1987, oil prices fell again causing an overconsumption and slowing down the production outside the Middle East countries.
But a new event occurred that changed this price balance. It was not until the Asian financial crisis in 1997 that this price appreciation finished. There was a price drop again until 1999.
After that time and following an agreement between different oil producing countries, the barrel price almost tripled to $30 and then decreased gradually to $28 in the year 2000.
Since 2001, the barrel price has kept increasing in response to a higher global demand, especially with the emergence of Asian countries which increasingly consume black gold. Production fights to meet demand and all the time there is less and less petroleum available which suggests that the price has not yet finished rising.
The markets where the oil price is determined:
The oil price is quoted on several financial markets that we will detail here so you can learn more about them.
Firstly, concerning the trading of oil, you should know the oil spot market as this is the market where trades and financial negotiations are concluded for the physical purchase of barrels of crude oil. Of course it is mainly the large oil companies and refiners that trade on this market.
Crude oil is cited on different major financial markets thereby representing the international market, these function 24 hours a day. The two most popular financial markets for quoting the price of crude oil are as follows:
- The NYMEX, or New York Mercantile Exchange, which is situated in New York.
- The ICE Futures Europe, or Intercontinental Exchange, which is situated in London.
On these two markets, there is no trading in physical barrels of oil as all trades are uniquely in figures and strictly ‘on paper’ as they are called even though nowadays trades are made electronically or digitally.
On the NYMEX and ICE markets, the oil price is determined by the positions taken by investors in real time. Here we refer to two prices, one is Brent which is the major European type of crude oil and the other is WTI oil which is the major American crude oil.
When you invest online, your positions are registered on these specific markets.
How are the prices per barrel of crude oil determined?
As you no doubt know, it is through the barrel unit that crude oil, whatever its origin, is quoted on the financial markets. You need to know that a barrel of crude oil in reality corresponds to around 159 litres of black gold.
The price of a barrel of oil is quoted on the international market, and this is 24/24, but we should point out here that two major financial marketplaces share the quotation, New York for WTI and London for Brent. You will therefore not speculate on the same markets nor for the same rates according to the type of oil that you envisage trading in.
How to explain the variations in the price of a barrel of oil?
As with all financial assets quoted on the stock markets, the price per barrel of crude oil is subject to fluctuations that essentially depend on investments made on a global scale. Therefore, several factors influence, more or less directly, the price per barrel.
The supply, or the production, and its stability is of course the first justification criteria for the price of a barrel of crude oil. It is OPEC that is responsible for deciding how many barrels will be produced per day and its publications are therefore studiously followed by traders. This organisation comprises a number of large producing countries from around the world.
Finally, factors linked to the demand are also primordial. Therefore, an increase in the energy needs of a large consumer country can influence, to a certain degree, the price per barrel of oil.
Why did the oil price suddenly drop in 2014?
The drop in the price of crude oil that we observe in 2014 is a concrete example of the price of black gold being linked to various influential factors. In fact, the crude oil price had actually been fairly stable over a number of years, between 2011 and 2014, then rapidly fell losing half its value in 2014.
This sudden and rapid fall in the oil price was actually caused by three easily identifiable factors. Firstly we note a far weaker economic growth in 2014 that the analysts were able to anticipate. This unpleasant surprise caused a fall in the industrial consumption of oil and therefore a fall in world demand.
Then, the global production of oil was strongly increased at the same time. This was largely due to the rise in production of shale oil in the United States that caused a major increase in the American stocks of crude oil.
Finally, and undoubtedly the most influential factor in this oil crisis, OPEC decided not to intervene in the oil price and didn’t reduce the oil price of its member countries production which again caused a rise in supply against the demand.
The factors that influence the price of oil:
The price of crude oil varies, as we have explained, according to supply and demand. It is therefore important to know this data before launching into trading this commodity.
Oil supply also comes from the oil companies responsible for extracting oil through the operation of wells. There is an organisation of oil exporting companies (OPEC) which is authorised to regulate the crude oil price through production quotas which are imposed on its members depending on the level of demand. Among the countries that belong to OPEC we particularly note Saudi Arabia, Iraq, Iran, Kuwait, Venezuela, Algeria, Angola, Libya, Nigeria, the United Arab Emirates, Qatar and Ecuador. You may notice that two major oil producing countries do not appear on this list, the United States and Russia. In fact, OPEC does not control all the crude oil production throughout the world, just a large part of it. In any case, decisions made by OPEC have an undeniable influence on the price of black gold. For example, when oil production in the OPEC countries is reduced we note a rise in the crude oil price.
It should also be noted that OPEC is not the sole cause of variations in the oil price relating to supply. In fact, other factors such as the discovery of new oil fields and the growth in the shale gas market have also exerted an undeniable influence on the prices. This is also true for geopolitical events that affect the oil exporting countries.
Concerning the demand for oil, it hasn’t stopped rising over a number of years thereby causing a rise in the price per barrel. In fact, the rapid industrial development of certain countries, notably in Asia, contributed to a major rise in the consumption of oil globally whereas oil production reached its limits or struggled to rise. In any case, to correctly analyse the demand for oil it is important to take into account the economic health of importing countries. In a period of economic crisis for example we note a fall in consumption and therefore in demand.
Apart from supply and demand, the price per barrel can also be influenced by other factors such as accidents on major production sites, a strong financial crisis, military conflicts that may affect major production areas, and the value of the U.S. Dollar.
Concerning the last point, the value of the dollar can exert a major short term influence on the oil price or that of commodities in general as it is in this currency that commodities are traded on the markets. Therefore a weak dollar tends to attract investors that use other currencies towards oil as it is beneficial due to an attractive exchange rate.