Thursday, May 9, 2013

How commodity trading is driving oil prices higher

Aside from the basic law of supply and demand, oil prices can also be influenced by commodity trading, and to understand better how this can potentially affect oil prices, it is very important to understand what the term “commodity trading,” in general, means.

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Commodity trading, which is also known as futures trading, means agreeing to purchase a specific commodity today, which will be delivered at a specific date in the future by means of a commodity or futures exchange broker. There are two types of oil commodity traders: those who actually purchase oil at a fixed price for delivery on a future date and those who are only interested in profit based on the price movement of oil and will sell the oil contract or commodity before the specified delivery date.

Here are some examples of how traders can actually influence the price of oil around the world:

• If traders believe that demand will outstrip supply and production, they will bid the price up, which also effectively increases oil prices.

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• If they believe that supply will outweigh the demand, traders would be willing to pay for oil, and the prices fall.

• If they believe that crises, such as armed conflicts and disasters, which occurred in oil-producing countries will affect the supply of oil, then prices increase. This was seen during the Arab Spring revolts when oil prices first rose and then fell when it was clear that the revolt will not disrupt oil production.

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Knowing how commodity trading affects oil prices will help companies and consumers prepare for the rise and decline of prices, so that they can plan for those eventualities financially.

Follow this Twitter account for Dr. Ali Ghalambor to access more industry-related news.

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