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Understanding crude oil prices amid war situation

Economy & Investing

To begin with, there have been numerous variations in the financial markets, oil prices, and much more as a result of the conflict circumstances between Russia and Ukraine, as they are all interconnected in some or the other way. Rising crude oil prices are seen as a big problem for India ., as any increase in raw material and energy prices might put more pressure on domestic firms' margins in the future. On Thursday, the price of Brent crude oil surpassed the $100-per-barrel threshold, as Russian President Vladimir Putin declared war on Ukraine. Brent crude oil has risen more than 30% year-to-date to $101.40 as of February 24. On December 31, 2021, the price of the commodity was $77.78 a barrel. With that, As understanding stock markets is easier than understanding the fluctuations in crude oil prices; we will be discussing the whereabouts of crude oil prices in this article -

What is Crude Oil ?

Crude oil is a subsurface combination of hydrocarbons that occurs spontaneously. It might take the shape of a thick tar-like material or an extremely viscous liquid. Crude oil comes in a variety of colors, from light yellow to dark brown to black. Oil, as well as oil derivatives, are traded on global oil markets, and it is one of the most commonly utilized fuel sources on the planet. Crude oil is often known as simply crude or oil. Before it can be utilized, this fuel source must be processed, and once refined, it comes under the category of petroleum products.

What is the significance of crude oil?

Crude oil is one of the most significant fuel sources on the planet, accounting for more than a third of global energy use in the past. The process of finding, extracting, exporting, and refining crude oil is lengthy, and the infrastructure required to support it must be in place. Thousands of kilometers of oil pipelines, storage facilities in key oil trade centers, and various refineries are all involved. The worldwide oil business is a multi-trillion dollar sector in total. Oil is particularly vital to sectors that rely substantially on fuel, such as aircraft, plastic manufacturers, and agriculture. Crude oil is a key import and export for many countries due to its importance as a source of energy. Oil and oil derivatives such as futures, forwards, and options have a large financial trading industry due to their importance.

What is the classification of crude oil?

There is no single variation of crude detected when it is discovered. It comes in a variety of shapes and sizes, and how it is transported and refined is determined by its content. Physical and chemical features are used to classify crude. Based on its density, crude oil is classified as light, medium, or heavy. The API gravity, or American Petroleum Institute gravity, relates the density of oil to that of water. A greater API gravity indicates that the oil is less thick than water and will float on it. A lower API gravity indicates that the oil is denser than water and will sink in it.

When it comes to oil, anything with an API gravity of more than 31.1 degrees is considered light. The API gravity ranges from 22.3 to 31.1 degrees, which is considered medium. It's deemed heavy if the API gravity is between 10.0 and 22.3 degrees. Finally, anything with an API gravity of less than 10.0 degrees is called exceptionally heavy.

How is OPEC related to Crude oil Prices?

OPEC is the central organization in charge of a large share of the world's crude oil extraction. It is a collection of Arab nations with several crude oil extraction locations. The organization aims to maintain a balance between supply and demand by limiting the amount of petroleum extracted in order to keep crude prices consistent throughout time. Russia and the United States of America are two other major oil producers. The economy and stock market remain in balance because to crude's well-balanced pricing structure.

How Do High Crude Prices Affect Economies?

a) Micro - Economics - When crude prices rise, it's natural to assume that the cost of petrol, diesel, and gasoline would rise as well. Small households' budgets will be hampered as a result of this. It will also raise rates for public transportation, airlines, and the transportation business, among other things. Because of the rise in transportation costs, the prices of almost all commodities will rise as well. By-products of crude oil are also employed as raw materials in a variety of industries, including packaging. As a result, the cost of such industrial items would rise, affecting consumers indirectly. Crude oil is also utilized as a source of energy. This will raise the energy costs of businesses and manufacturing facilities, and so raise the pricing of everyday commodities. As a result, a spike in crude oil prices has a direct and indirect impact on numerous businesses and consumers.

b) Macro - Economics - Inflationary pressures are exacerbated by rising oil costs, and economic development is slowed. The reason for this is that crude oil is linked to almost all industries and production units. The rise in crude oil prices raises the cost of goods. As a result of the high expenses and low returns, certain industries will be unable to create additional units. This will have an impact on countries who import crude oil. Such nations must now pay a higher price for petroleum as well as pay a higher tax to the government. As the extra money spent on taxes cannot be utilised to purchase other commodities, this will have a direct impact on the production cycle. Crude is also the starting point for petroleum, chemicals, plastics, and gasoline. As a result, the higher the price of petroleum, the higher the cost. In the end, this reduces an individual's purchasing power, which is an indication of inflation.

What factors influence the price of crude oil?

• One key aspect that influences crude oil prices is the extraction site. It is significantly easier to transport crude oil throughout the world if it is extracted near the coast. If it is to be transported internationally, it must be extracted farther inland and delivered by pipeline systems to refineries and, finally, to the coast.
  
• Oil benchmarks are used as a pricing technique for establishing the price of crude oil. There are several benchmark pricing for different oils, each with its own density and API gravity. West Texas Intermediate oil and Brent are the most often used benchmarks. Analysts can compare and assess the pricing of different crude oils by having an accessible price that correlates to a certain geographical area, density, and gravity.
• Due to the growth of many businesses and economies, there has been a significant increase in oil consumption recently. Oil and its derivatives are in more demand as the world's population grows. The demand for crude has risen as a result of this. On the other hand, petroleum supply has not grown in tandem with demand. Furthermore, the creation of crude oil within the Earth's crust takes thousands of years. As a result of the low supply and high demand, crude oil prices have risen. The demand for oil has recently fallen due to the COVID outbreak and lockdown scenario. On the other hand, crude output cannot be stopped. As a result, there was an excess supply of crude compared to demand. Because crude is heavily utilized in the transportation industry, the shutdown had a direct impact. The price of crude even reached negative at one point. The cause for this was an increase in supply, a shortage of storage space, and a lack of demand. As a result, demand and supply of crude oil play a critical role in pricing crude oil and preserving global economic equilibrium.

If you prefer purchasing oil stocks or are wondering about why oil prices rise and fall, this article might help you understand why. Because it is preferable to comprehend the reasons prior to investing. Finally, it has been stated correctly that whoever controls oil, controls more than oil.

- TEAM IFA