How the oil price is set
You are not watching supply and demand for oil today. You are watching a bet on supply and demand for oil next year.
Understand why oil moves on news from places with no oil.
How the oil price is set works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The basket is an average, and you are not average
If you rent in a city and drive to work, your personal inflation rate in a year of surging rents and fuel can be double the headline. The number is not lying. It simply is not about you.
- 1
The price you see is a futures price
The headline oil price is the price of a contract to deliver a barrel in a future month, not the price of a barrel today. It is therefore a forecast, and it moves on anything that changes the forecast.
- 2
Supply is unusually controllable
Most commodities have diffuse supply. Oil has OPEC, a group that can and does turn production up and down deliberately to influence price. This is why a statement from a meeting can move the price more than an actual shortage.
- 3
Demand is slow to respond
You cannot stop driving to work because oil went up 20%. Demand is inelastic in the short run, which means small changes in supply produce violent changes in price. That is the core reason oil is so volatile.
- 4
And geopolitics is a supply story
A conflict near a shipping lane does not reduce the oil in the ground. It raises the probability that some of it cannot be moved, which changes the forecast, which changes the futures price today.
You can explain why oil rises on a threat that never materialises.
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You are not watching supply and demand for oil today. You are watching a bet on supply and demand for oil next year.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.