Empirically, it is easy to see how the cost per barrel of crude exerts significant influence over aggregate gas prices.

(bettertrades) - Crude prices are generally tied to 3 main factors: Supply and demand, geopolitical events that help shape the supply/demand function, and a dollar-inflation correlation.

Supply and Demand

By a wide margin, supply and demand is the greatest factor affecting gas prices. 2008's dramatic downturn in global growth strained the demand side function, forcing prices off their mid-summer high of $147/bbl to $40/bbl. Looking forward, a dramatic increase in consumers amongst developing nations entering the middle class, specifically in China and India, could place considerable strains on demand. The result of which will likely be significantly higher long-term prices.

Geopolitical Events

Affecting the supply/demand function, geopolitical events often put detrimental force on the supply side. Conflict in oil producing nations such as Iraq or Nigeria often spark a rally in crude prices over concerns about production halts.

Sidebars to geopolitical disruptions are weather events such as hurricanes and the weekly U.S. Department of Energy report. Weather patterns often disrupt refinery capacity in the Gulf of Mexico, causing sharp uptrends in crude. Draws in weekly inventory stockpiles as reported by the D.O.E. tend to increase prices while builds mostly cause a decline in prices.

Dollar-Inflation Correlation

Generally speaking, when the dollar appreciates relative to worldwide currencies, inflationary pressures decrease, resulting in a decline in crude prices. Conversely, when the dollar depreciates, inflation rises along with rising energy costs. Massive quantitative easing at the Federal Reserve serves to unhinge the dollar as lower interest rates reduce the demand for low-yielding instruments. With the benchmark fed funds rate at or near zero, the dollar could find support if Europe follows through on lowering rates.

Article Index

• Intro
• Cost Per Barrel
• Other Factors
• Where is the oil
• Forecasting