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Lecture # 11 - Oil Price Formation
Lecture # 11 - Oil Price Formation
Hassan Z. Harraz
hharraz2006@yahoo.com
2015- 2016
50%
Nuclear 45%
Hydro Oil
40%
6.3%
35%
6.0%
Oil Coal
30%
36.4%
25%
Coal Gas
27.8% 20%
15%
10%
23.5% Hydro
5%
Natural gas Nuclear
0%
1970 1975 1980 1985 1990 1995 2000 2005
OECD/IEA - 2007
No single cause of high prices…!
3.3) Weather
• That sounds strange that weather can affect oil price, but it will.
• Storms in the Gulf region of the United States as well as the North Sea can halt production of crude
oil both on drilling platforms as well as refineries which may be shut down anticipating the arrival
of a bad storm.
• Events like Hurricane Katrina stand as strong examples of how weather may have a direct impact
on crude oil price.
• You have just viewed some fundamentals that affect on crude oil prices. There are some more but I
can’t list out here for you because of the limited spaces. Just discover more from the resource. By
the way, keep up with the oil and other futures market prices for your investments!
Oil prices:
Implications for supply and demand
A dynamic equilibrium of factors
The basic story: As long as supply far outstrips demand, oil prices will stay relatively low.
Ultimately, the supply and demand dynamic is the thing to keep an eye on. And expectations matter enormously here.
Whenever new data shows an unexpected boost in oil production or an unexpected drop in oil demand, prices tend to
go down.
Conversely, a surprise drop in supply or a surprise surge in demand will push prices back up.
As global production changed relative to demand, the world moved from a period of “Over Supply” (or peak oil) in 1998 to
one of “Under Supply” in 1999 and 2000.
Inventories are a good means of seeing the imbalance between petroleum production and demand.
For example, when production exceeds demand, inventories rise. A large over supply will put downward pressure on
prices, while under supply will cause prices to rise.
4.1) Rising Oil Prices
$139 by June 2008
Tight crude and product fundamentals push oil near $100/bbl in late-November
Resilient demand growth – driven by non-OECD regions
Concern over inventory cover ahead of winter demand
OPEC-10 production has fallen, despite rising oil prices
23
Figure : Present and future global oil and liquids supply cost curve
www.oftwominds.com
High oil prices are one of the major factors affecting the Iranian economy.
Iran may decide to reach a nuclear deal with the US to ease economic sanctions.
Alternatively, perhaps the supply glut — and hence low prices — will persist indefinitely.