While basic supply and demand theory says that as more of a good is produced, the price should fall (assuming everything else remains the same), it can take a lot to produce oil and the equipment used to transport it. That is why the price can fluctuate so wildly.
For example, natural disasters often cause spikes in prices due to a disruption of oil production or transportation. Hurricane Katrina in 2005, for instance, affected 20% of the U.S. oil supply and caused prices to rise by $13. The threat of political instability in the Middle East, which produces a large percentage of the world’s oil, can also drive oil prices up and down.
Home heating oil is another thing that can be seasonally driven, as people use a lot of it during the winter. Getting it from the Gulf Coast or Europe takes weeks and requires travel through harsh climates, which drives up prices.
OPEC, the Organization of Petroleum Exporting Countries, also influences oil prices by controlling most of the world’s oil reserves. Its members negotiate oil export quotas to control the global supply and affect prices.
While there is a debate on the impact of oil prices on stock market performance, most studies have found that higher or lower oil prices tend to negatively or positively impact stocks. However, the direction of this effect is dependent on a number of factors and can vary widely between nations that import or export oil.
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