Wednesday, February 23, 2005

Yahoo! News - Crude Oil Prices Rise Above $50 Mark

Yahoo! News - Crude Oil Prices Rise Above $50 Mark

This is what i understood..
Crude oil prices is basically controlled by two entities.

1.OPEC which consists of 11 countries from the middle east.
2. Commodity

Commodity is essential because those middle man company such as shell, Petronas and etc.. even though having their own oil plant (they called it the upstream business), the production will not be enough for their sales demand. So, everyone will upstream their oil into a big market (commodity) and from there they buy it again at another price.

Commodity future is a different thingy.. that is mainly financial play. Where based on the actual market (commodity), another gameplay are cater for prediction of either go high or go low.

Therefore, commodity is just like the stock market.. the prices is based on demand and supply. Thus, when demand high and supply low, the price goes up and vice versa. The role of OPEC is just to offset that, where since they represented 41% of the total oil production in the world, they can make price goes down when the demand is high by increasing production (supply). Why they do this..? because they have agreed to regulate the oil market.

Thus, the future traded crude oil as $50 per barrel because they think that OPEC would cut production when the demand is high in USA and Europe due to cool spell. This is only the idea of those future traders.. OPEC have two choices over here...

1. Cut production when it is not practical for oil producer to work extra hard without increment of income.
2. lower the price for the benefit of USA and European consumer by maintaining current production rates.

Therefore, the contribution is actually to benefit who more ? For them to choose option 2, they must have political interest in USA and Europe or USA and Europe must have interest in situation corresponded to option 1. In other words, let say Europe have big impact in producing oil. When APEC cut production, the price would increase and the profit margin would benefit Europe. This windfall can be used by Europe to pay as subsidy to its customer for petrol. But how much can Shell do in order to make this a big significant?

What USA is trying to do now is to realize option 2, using political method. By invading Iraq, the USA claimed to create stability in the middle east region and thus gives pressure for APEC to consider USA's goodwill effort. Needless to say, USA refuse to sign Kyoto agreement because they publicly acknowledge that such move would hamper its economy. Thus, a lower crude oil price would definitely help with its economy too.

No comments: