Most of us are always shocked at the erratic movement in crude oil prices. But there are lot of factors that affect the crude oil prices , beyond the basic demand and supply issues :
- Global political environment, and specifically in the oil producing middle east region. More the tension in Middle east region, higher will be the oil prices. Immediately after the invasion of Iraq, the crude oil prices went down, but once the world realized that normalcy may not return to Iraq in the near future, crude oil prices started moving higher and higher.
So if there is real stability in Iraq, you can expect the crude oil prices to remain stable or even trend lower. But that could be more than offset, if Iran gets into confrontation with US or the West.

- Availability of low cost funds for global speculators pulls up or down the crude oil prices. Crude oil is the highest traded commodity which is of interest to every country in the world, be it India or South Korea or China or Japan or US or Europe.
Japan had the lowest rate of interest right from 2007 which was exploited by many hedge funds, in borrowing low cost funds from Japan and then investing that money in speculative deals. But when US and Europe started increasing the interest rates, the borrowing of funds from Japan turned not-so-lucrative, which reduced the fund availability for speculative funds.
So look for major changes in the interest rates in leading economies.
- Collapse of any major global company can squeeze out investors across the globe : When US investment banker Lehman Bros went under without any notice, all other bankers became wary, and started increasing the interest rates for unsecured credit, and even asked for returning of funds from weak borrowers. This forced many hedge funds to pull back money from the crude oil market, by closing down their long positions. That lead to steep crash in the crude oil prices from 147 dollars to around 70 dollars in just few months.
So watch out for any other major global company bankruptcy announcement, if you are investing in crude oil market.
- Surge in demand in new big markets : China and India have over 35% of the world population, but consume less than 15% of the global crude oil production. A sneak into their last one decade data would indicate to you that these two countries together had the highest growth rate in crude oil consumption. Even after such a health growth rate for nearly a decade, these two countries are still left out with a huge gap between potential and actual consumption.
So, if India and China continue with their economic growth plans , then they can more than offset the drop in crude oil consumption in the US + Europe. And a sharp economic decline in India or China, could really pull down Crude oil demand substantially.
So keep watching the economic growth trends of China and India.
- Increase in crude oil production capacities : Crude oil production capacities are currently 10% more than what the world needs, and these cannot be increased at short notice. So if the demand goes up substantially for whatever reason, and if supplies also get cut down by few percentage points, then you can expect crude oil prices to shoot up substantially.
- New gas and oil finds across the globe can also influence the global crude oil prices due to change in demand scenario. So keep tracking such events very closely. India has doubled its natural gas producing just a month back, which means its demand for imported crude oil will come down in coming months.
- Risk appetite of global investors from US / Europe / Japan / China : The individual retail investors in these countries collectively hold over four trillion dollars of money in various investments. These people had withdrawn out of their risky investments from 2008 September till February 2009.
Since March 2009, Most of the global funds who had withdrawn out of risky investments have started to put back their cash into commodities including Crude oil. Even as of last week, these funds have invested over 15% of their corpus in cash, which means more money waiting to be invested.
Based on evaluation of all the above factors, we can safely conclude that the crude oil prices will remain in the 60 dollars to 100 dollars mark for the next few months.
And if somebody tells you that the OPEC is controlling and influencing the crude oil prices, please do not believe that. The OPEC body is helpless and does not seem to be in control of the crude oil prices in any way. They are actually to be pitied for their dependence on the speculators for their fate.