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What Impacts the Price of Oil?

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The oil market may seem complicated to those not in the industry, but what impacts oil prices is fairly simple. Three major factors—supply, demand, and geopolitics—drive the price of oil; all three also have an effect on oil giants like ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) , and their bottom lines.

Supply refers to the amount of oil available, which has historically been determined by countries in OPEC. Recently, the U.S. has ramped up its oil production, and if these regions pump out a lot of oil, supply will then be at high levels.

Demand is determined by how much of a need there is for oil. For example: if a region starts experiencing more economic growth, a higher need for heat, electricity, and transportation will likely follow, resulting in more demand for oil.

Then there’s geopolitics. If there is war or conflict in an oil-producing region, crude inventories could seem under threat, altering the price of oil.

Most investors follow West Texas Intermediate (WTI) or Brent crude prices; West Texas is a kind light crude that comes from the U.S., while Brent crude refers to oil from certain oil fields in the North Sea.

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