One thing that frustrates motorists more than anything else is the price of petrol. Depending on the price, one day you feel like you get an early Christmas present, and the next you feel like you need to take out a loan to fill your tank. So, what is it with the roller coaster ride on petrol pricing?
Depending on where you live, the pressure at the pump may be off for now, or you may be near empty, hoping it comes down. Either way, you’d be wise to understand the factors that drive the price of this commodity, given it is essential to our daily lives.
What factors influence the price of oil?
With fighting in the Middle East and Ukraine, labour shortages and inflation, you would think that oil prices would be skyrocketing.
While there are many components to this, let’s keep things simple. We know that Saudi Arabia, Russia, Canada, Iraq and the United States are the top five oil exporters globally, with three of these countries being members of the Organization of the Petroleum Exporting Countries (OPEC).
OPEC, or ‘the posse’ as some call it, determines the price of oil by increasing or decreasing supply. In June, OPEC announced they would extend their crude oil production cuts throughout 2024 to ‘stabilise’ the oil price.
Limiting supply has an inflationary effect on the oil price, which helps member countries maintain favourable revenue levels. While this sounds like a cartel, there are laws stopping businesses from colluding to control prices, but countries seem to do what they like.
On the other side of the equation, we have demand. China, one of the world’s biggest consumers, is seeing a slowdown in its economy and has recently reported a fall of 6.4% in its exports but a rise in its imports of 3%.
On top of this, Reuters reported that China has benefitted from buying cheap oil from sanctioned countries such as Venezuela and Iran.
There’s also been a lot of doubt about the outlook for oil as we move onto greener pastures with eco-friendly energy solutions, and some questions have been posed about the current oversupply.
I don’t believe we will ever be fully rid of oil as it’s needed for various production purposes, including EVs, but the good news is that we will see a downtrend in price continuing for quite some time.
From a technical perspective, if we look at the spot price of oil (CLSpot), it is trading at a critical level, and if it falls below this level, it could signal a further drop of 14% to around US$63, which means, we might all have a good Christmas.
Dale Gillham is the chief analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au