Ever wonder why markets for commodities, oil in particular, can be so volatile from time to time? Well, there’s a mix of factors that can affect commodity markets, and they usually do so as conflicting forces. Understanding commodities can be challenging even for those who analyze commodity price moves for a living. Should we focus on the positive factors and discount the negative ones, or vice versa?
A commodity by its very nature is something widely demanded across the board for use in the economy, such as oil as an energy source invaluable for every facet of the economy, and this can lead to constant moves in commodity markets with continuingly changing economic conditions when compared to many other commercial products. While certain non-commodity goods or services may not yet be in demand as the economy improves or may remain in need even as the economy worsens, the oil always flows in the same direction that the economy is headed to. So we can be reasonably sure about how changes in unemployment at home and other economies around the world may do to oil price.
The oil market is highly sensitive to expected supply situations partly because oil is a limited natural resource rather than something that can be man made through better-controlled manufacturing. Any anticipated oil supply disruptions, especially those stemming from geopolitical concerns, will most likely rally the oil futures market. Oil prices are followed on a future basis rather than on the spot, and the result of constant price predictions by market participants. Current concerns about oil supply, satisfactory or otherwise, has more implications on oil futures than on its current spot price.
While monetary policies may cause concerns about inflation or deflation on goods and services in general, they have an acute effect on commodity prices including oil price. Oil is traded worldwide in dollar denomination, and what the Federal Reserve decides to do -- making the dollar easier or harder to borrow -- will ultimately stoke or inhibit demand in the oil market. With more or less dollars floating around, the dollar-priced oil will ride the dollar floating waves, rising or falling along the way.
Hopefully now we know what to look into when trying to make sense of the ever-changing oil price.
A commodity by its very nature is something widely demanded across the board for use in the economy, such as oil as an energy source invaluable for every facet of the economy, and this can lead to constant moves in commodity markets with continuingly changing economic conditions when compared to many other commercial products. While certain non-commodity goods or services may not yet be in demand as the economy improves or may remain in need even as the economy worsens, the oil always flows in the same direction that the economy is headed to. So we can be reasonably sure about how changes in unemployment at home and other economies around the world may do to oil price.
The oil market is highly sensitive to expected supply situations partly because oil is a limited natural resource rather than something that can be man made through better-controlled manufacturing. Any anticipated oil supply disruptions, especially those stemming from geopolitical concerns, will most likely rally the oil futures market. Oil prices are followed on a future basis rather than on the spot, and the result of constant price predictions by market participants. Current concerns about oil supply, satisfactory or otherwise, has more implications on oil futures than on its current spot price.
While monetary policies may cause concerns about inflation or deflation on goods and services in general, they have an acute effect on commodity prices including oil price. Oil is traded worldwide in dollar denomination, and what the Federal Reserve decides to do -- making the dollar easier or harder to borrow -- will ultimately stoke or inhibit demand in the oil market. With more or less dollars floating around, the dollar-priced oil will ride the dollar floating waves, rising or falling along the way.
Hopefully now we know what to look into when trying to make sense of the ever-changing oil price.
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