Principles of Pricing in Oil Trading

This paper would seek to outline some of the possible global causes as to why there are changes or fluctuations in oil prices. It would seek to determine some of the trade relationships, the effect on the present scenario, and the future challenges which would be faced by the oil producers/consumer.

If one was to analyze the oil prices trend over the last few years, what comes across is the fact that there has been an increasing trend and while some the causes have been as a result of the unanticipated increase in global demands in emerging markets such as those in the Asian region.

If one was to analyze the crude oil trend in April 2009 in the US market, the US crude oil futures rose from $ 1.80 to 51.42 a barrel after having risen for as high as $ 51.75 which hints at the meteoric rise in the US oil prices.

As a result of the firmer stock markets and the weakening US currency, the oil prices have risen and are continuing to rise. Added to this is the fact that the weaknesses of the US currency against other foreign currencies have resulted in rising oil prices. However, as the global market has been weakened as a result of the economic recession, that has resulted in the inventories of the consumer nations rising to a great extent especially in the case of the US.

Amongst some of the reasons which have resulted in the rising oil prices, has been the increasing oil demand particularly in the case of the USA which is one the leading importing nations of oil. The rising oil prices have resulted in increasing the trade deficient but the overall oil demand has remained constant highlighting the fact that the US demand is price inelastic.

The top oil-exporting nations for the US were Mexico, Canada, and Saudi Arabia and since Saudi Arabia is a component of the OPEC organization, its rising prices play a significant role in increasing the global oil prices. Since the global demand is clearly more than the global supply; hence these exporting nations have been able to charge their own prices accordingly.

As a result of the geopolitical uncertainties, inadequate refining capacities in the US to cope with the rising demand, multiple specifications for gasoline for different states, and the heavy speculation in oil by the investment funding companies, the oil prices have increased substantially.

One of the countries which play an integral role in this aspect is Nigeria whose economy primarily depends on its oil exports. It is a major regional partner in the organization (ECOWAS) and in the continental one; AU. Added to this, being a part of the OPEC cartel, it has a strong role to play in the global oil market and hence, Nigeria’s regional and development aspirations are also connected to the global market.

However, the regional conflicts which take place within Nigeria have resulted in having a hugely negative impact on the Nigeria oil industry and its lack of supply responsiveness which further drives up the global oil prices.

One of the bigger sources of oil, Iran shares a turbulent relationship with global giants such as the US, U.K., and many European nations and hence, its supply service has been constructed according to these geopolitical turbulences. The sanctions imposed by the Bush administration were majorly affected by the Iran-Chinese deal which allowed for a trade of oil and natural gas allowing, Iran to develop strategic alliances after decades of trade sanctions.

In further development, Iran and India, Argentina have also pondered a trading relationship that can further undermine the sanctions act outlined by the US which can have a substantial effect on the oil prices which at present are being controlled by the OPEC cartel. However, once the supply of Iran increases substantially that could result in decreasing the prices to a great extent.

One of the biggest oil-exporting nations, Venezuela has come out with a new political stance in which it has threatened to stop all sorts of oil and refined petroleum products to one of its biggest customers and trade partners; the United States. However, if this threat was examined in terms of its short-term effects then that would be minimal as such decisions do take some time to show their effect.

However, if the same was examined on a long-term basis then what would come across would be the state oil company PDVSA‘s future is hence, a cause for concern due to the political instability of the nation. Added to this is the recent global crisis and the oil prices fall could create an even worse financial turmoil for this country.

Hence, what has come across is that all the above reasons could play a substantial role in the way the international oil prices are decided and the movements of the oil prices as well. In certain cases, the worsening geopolitical situation and in other cases, the increasing supply has made the oil prices a cause for uncertainty and speculation for many investment companies. Hence, the future is itself unknown but the demand is to a large extent portraying a consistency.


Gasoline and diesel fuel prices, EIA, Department of Energy.

Oil prices bounces back above US$50, BBC News.

FACTBOX-The World’s Oil Shocks (Planet Ark).

NYMEX future prices for light sweet crude, Session Overview.

NYMEX future prices for light sweet crude, Session Expanded table.

Downey, Morgan (2009). Oil 101. pp. 318-328. Web.

Downey, Morgan (2009). Oil 101. pp. 318. Web.

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