Oil prices worldwide

Just like prices of any other commodity, oil prices are determined by the market state based on supply and demand. For instance, in the US, 70% of the oil is used for transportation, a quarter is used for industry and the rest for all other uses.
Nevertheless, other factors come into play in determining oil prices such as political issues in oil-producing countries, wars, natural disasters (by oil being a product of coal, which is a natural resource) and even speculative trading.
Unlike other commodities, most of the oil is not traded in a stock exchange and its prices are linked to prices set in a stock exchange by a variety of agreements. This is due to the fact that every oil well has its own output (both in quality and quantity.)


How are oil prices determined?


Two factors determine oil price. The first parameter is comprised of three negotiable contracts:

  • The OPEC basket, that is determined by the oil producing countries for the purpose of controlling oil prices by controlling oil production
  • Brent oil
  • Texas sweet crude oil
    The second parameter in use alongside the first is the three reference indices (return indices), namely a price, which is a combination of several commodities trades in a stock exchange. As mentioned, there are three indices weighted in oil prices:
  • Contract prices in the oil sector
  • Oil prices including transportation
  • Oil prices without transportation


The impact of the COVID-19 pandemic on oil prices


The global COVID-19 pandemic we have experienced in 2020, and especially flight restrictions, various blockades, event cancelling and social distancing led to a significant decline in oil prices.
For instance, a significant decline was experienced in the demand for fuel for transportation (including aircraft fuel) and industry. Here are several major milestones in the decline of oil prices during 2020:

  • March 6, 2020 – demand for oil dropped to 4.5 million barrels below forecasts, leading to a decline in oil barrel prices to 42.1$.
  • March 8, 2020 – oil barrel price dropped to 30$, a price failing to cover production costs in Britain, Canada, Brazil, Nigeria and Venezuela.
  • April 20, 2020 – for the first time ever, a negative price for crude oil future contracts was registered in the US, mostly due to high demand for storing oil surplus. Shortage in oil storage facilities was experienced in many countries and in the US, storage levels reached an all-time high of 57%

Crude oil prices war and Black Monday

Although this is a serious plunge (although it is yet to be over, some anticipate it will take a steeper drop than the one experienced due to the 2008 world economic crisis), it was not the only cause.
Other elements that led to the price drop was the crude price war between Russia and Saudi Arabia, which led to a decline of American oil prices by 34%, crude oil by 26% and Brent by 24%.
Some claim that these declines were one of the causes of Black Monday, the global stock market crash on March 9, 2020.


Are oil prices expected to increase or decline?

Since oil is based on coal, which is a finite natural resource, a theory asserts that at a certain stage, the global oil production will reach a peak (leading to rising oil prices) and then will decrease, leading to a decrease in oil prices.)
Nevertheless, when taking into consideration the fact that the oil-producing countries control the pace of oil production and as a result, its prices, this theory is most likely to fail in meeting a reality test.
On the other hand, during the last several years, as part of embracing an environmental agenda, there are increasing efforts to find alternative energy sources. However, at the moment, none of the alternative is cheap, clean of in the abundance required for the objective of replacing oil.
This means that none of the alternatives is realistic at the moment, so oil prices would keep on being a function of market forces and of OPEC. At least for the coming future or until the pandemic is over.