Where Do Oil Prices Go From Here? What Factors Will Hold The Greatest Influence On The Price?

Some experts suggest oil prices will be range-bound for a while before heading lower, even as low as $20 per barrel. Others believe oil prices are about to head north before settling somewhere between $70 and $80 per barrel. Who is correct and can we really know for sure? In this article, we’ll look at the price history of crude oil, changes in production over time, inventories, and examine the factors which have an influence on the price of this essential commodity.

What influences the price of oil? Contrary to popular belief, oil prices are not controlled by the actions of an individual, regardless of the power he or she may wield. Although it’s somewhat credible that a group, such as OPEC, can influence the price of oil, the issue is much larger than that. The reason for this is that oil is a globally traded commodity with millions of buyers and sellers. The real catalysts for the price of oil are supply and demand plus any event which has the potential to alter the production, transportation, or the perception of it. Let’s take a closer look at this issue.

This includes political events, natural disasters, and accidents. A recent example of an accident occurred this past Monday, February 16, 2015, at 1:30 P.M. EST. Approximately 30 of the 100 cars of a train carrying crude oil derailed in West Virginia, resulting in a massive explosion. Fortunately, only one home was destroyed and there were no fatalities. It could have been much worse. This incident has rekindled the debate over expanding our pipeline system, which is a much safer and cheaper method of transporting crude. Transporting crude oil through an underground pipeline is estimated to cost about $5 per barrel versus $10 to $15 per barrel to transport by train. However, adding pipeline is expensive.

Where do we go from here? What factors will hold the greatest influence on the price of this valuable commodity? Once more, any factor, event, etc., which has the potential to disrupt oil production, or its transportation, will influence the price of crude oil. This is partially why a simple supply and demand equation cannot adequately forecast its price. Therefore, we’ll have to deal with the facts at our disposal and use our intuition for the rest. Referring again to the chart above, we can see that U.S. oil inventories (top chart) remain elevated. We can also see how U.S. production continued to rise (middle chart) despite the decline in the price of oil. However, it should be noted that the production shown in the middle chart is only to November 2014. Unfortunately, that’s the latest data available from the Department of Energy’s website. Even through November, production remained strong as oil fell to $66.00 per barrel.